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Fund Accounting for Small Organizations

Overview

Fund Accounting systems provide a self-balancing set of funds within an overall accounting structure. A fund consists of a set of assets, liabilities, and equity accounts which is maintained in balance using the accounting equation Assets = Liabilities + Equity. Among accounting professionals, the term Fund Accounting is often applied to governmental or non-profit organizations. However, fund accounting principles are also applicable to profit based businesses.

Non-profit, church, and governmental organizations use funds to segregate their accounts by objective - to track a particular grant, for example. The granting organization will often require an audit of how the grant money was spent. The grant may have been used for such things as salaries, postage, office expenses, program fees, etc. Each expense will be recorded in an appropriate category; however, this does not give an overall picture of how the grant was used. By doing a fund accounting based balance sheet and income statement report, the organization can demonstrate how the grant was used and show its current remaining assets. In addition to tracking individual programs, non-profit and governmental organizations often need to combine individual funds into groups. A typical grouping would be Permanently Restricted Funds, Temporarily Restricted Funds and General Funds. These groupings are often top level funds while sub-funds are used to provide detail.

In a similar fashion, for-profit organizations often have a need to track expenses and assets by purpose. A retailer may need to track individual store locations or departments; a contractor may track projects; or a manufacturer may want to track products or departments.

Fund Accounting is useful to look at accounts in more than one way. The traditional way is by expense categories: salaries, stamps, rent, etc. Fund Accounting provides an alternate view by purpose: grants, departments, locations, projects, etc.

Fund Accounting with QuickBooks

Many full featured fund accounting software packages are too expensive and are overkill for smaller organizations. One very popular accounting package for small businesses is QuickBooks. While QuickBooks does not provide the fund accounting features of larger packages, it can be used effectively for that purpose. This discussion will center on QuickBooks, however, many of the same principles can be applied to other packages.

QuickBooks has a feature which allows coding of transactions with a class code. Class codes can be used to segregate transactions into any desired category. An obvious use is to use classes for funds. Once income and expense transactions are assigned to funds using class codes, QuickBooks can create budget or income statements segregated by fund. For fund accounting purposes, what is missing is the ability to do a balance sheet report by fund. There are two different approaches to handling this problem: manually transfer earnings or use FundsFix to automate the process.

Manual Earnings Transfers

First, determine what balance sheet (assets, liabilities, equity) accounts will be assigned to each fund. As a minimum, create one equity account for each Fund and name it something like “My Fund Earnings.” Then periodically transfer general earnings to the specific Fund earnings accounts. Decide whether to do this once a year, once a month or more frequently. Just remember that once earnings are transferred for a particular period, do not enter transactions that will change the earnings for that period or the transfer will have to be redone.

 

At the end of the chosen period run an earnings report for the period for each fund by setting the appropriate filters for dates and class code. Note the earnings for each fund, and then create a general journal transaction to transfer earnings from the “Retained Earnings” account to each fund earnings account that was created earlier. The balances of the fund earnings accounts will contain the allocated earnings for each fund.

Create a partial balance sheet report for each fund by running a balance sheet report and setting the account filter to include the fund’s earning account and any other accounts that are part of the Fund. The reports are partial in that they are not in balance because they will not contain the necessary inter-fund balancing transfers; however, the result will nevertheless give some meaningful data. One caveat, when the QuickBooks “Clean Up Company Data” operation is run, QuickBooks removes the class data from old transactions as it summarizes them so it is very important to transfer the fund earnings before doing this operation.

Automation with FundsFix

FundsFix is a QuickBooks add-on which is designed to automate the process of creating fund balance sheet reports. It provides several advantages over doing it by hand: it creates a fund per column balance sheet to allow fund comparisons; it determines earnings dynamically which means that changes to older data are automatically incorporated; it automatically generates inter-fund transfers to keep each Fund balanced; and it provides a utility to run when doing a QuickBooks “Clean Up Company Data” operation to prevent loss of data.

Once FundsFix is installed all its functions are available under the QuickBooks Company menu. To get started, use the FundsFix Setup menu to assign class codes to funds and to assign balance sheet accounts to funds. The conversion from a manual system to FundsFix is usually straight forward since both systems use class codes to designate funds. It is also possible to create sub-funds to allow aggregation of funds such as Permanently Restricted Funds, Temporarily Restricted Funds, and General Funds.

FundsFix creates fund based balance sheets using a familiar QuickBooks like interface. Reports may be filtered by fund if desired to create sub-set reports. Reports may be also filtered with many of the common QuickBooks filters. The resulting reports may be exported for further analysis or may be printed using the familiar QuickBooks formatting options.

FundsFix also provides several features that facilitate fund accounting. There are two Auto Balance features. The first is used to establish known fund balances. This feature is a great way to get your books into fund balance when you first start using FundsFix. The second auto feature is used to re-establish fund balances by adjusting equity to match earnings. FundsFix also has a distribution feature that allows you to do periodic allocations between funds. An example would be a non-profit which needs to allocate administration expenses to a grant.

FundsFix allows QuickBooks users to generate meaningful fund accounting data. With the normal QuickBooks reports, the user can produce fund based P&L and budget reports. FundsFix provides the ability to generate fund balance sheet reports. The combination provides a comprehensive funds accounting solution for small nonprofits, governments, and businesses.