Why Nonprofits Need Fund Accounting

Why Do Nonprofits Need Fund Accounting?

Like for-profit organizations, nonprofits must implement stringent financial management and reporting practices. That’s why fund accounting exists. Unlike a traditional accounting system that focuses on profitability, fund accounting tracks the amount of cash an entity receives and how and where it allocates the money.

Nonprofit Fund Types

Each nonprofit establishes a unique set of fundraising programs and activities that require the creation of separate funds. Common types of nonprofit accounting funds include:

  • Unrestricted: The cash in this fund may come from various resources, and the organization can use it as it wishes.
  • Current restricted: This fund consists of cash the organization receives for a specific purpose.
  • Restricted endowment: A restricted endowment fund contains donated financial resources that the organization must keep intact forever or for a predetermined time frame. In the meantime, the nonprofit can only utilize the income the asset earns via investment returns.
  • Designated: This fund type enables donors to choose the specific entities they wish to support.
  • Fixed asset: The fund account covers fixed assets such as buildings, equipment, land and computer software while keeping them separate from the proceeds in an unrestricted fund.

Avoid a Common Mistake

Many nonprofits assume they must create a separate fund for every activity, project or program in which they participate. In reality, having too many funds often leads to costly tracking and reporting errors. A more practical solution is to establish program codes within each fund. These classifications, also referred to as functional areas, encompass the fundraising, program and management and general categories.

The Fundamentals of Fund Accounting

When setting up a fund accounting system for your nonprofit, you’ll need to create specific codes and identifiers for classifications such as location, project, donor and grant. This process enables you to establish separate categories for each area, which streamlines tracking and provides transparency. You’ll also be able to target strengths and weaknesses and make more informed financial decisions.

What Is the Purpose of Fund Accounting?

The use of fund accounting makes it easier for nonprofits to manage multiple revenue streams and track the various restrictions associated with each one. Moreover, fund accounting systems help to ensure organizations aren’t spending their money in the wrong places. Each fund will have a designated revenue and expense report to provide additional transparency and clarity as to where donor dollars are going.

Another specific purpose of fund accounting is maintaining compliance with Financial Accounting Standards Board (FASB) regulations. In 2017, the FASB implemented updated guidelines that simplified the treatment of net assets in nonprofit organizations. The new rules established two net asset classifications — those with and without donor restrictions.

MIP Fund Accounting® Software Can Meet Your Nonprofit Accounting Needs

MIP® offers easy-to-use fund accounting software that delivers a simple solution for managing your nonprofit organization’s financial processes. You’ll be able to track funds, manage books and perform a host of other accounting functions quickly and more efficiently than ever. 

Visit our MIP Fund Accounting software page to learn more. You can also schedule a demo to see our nonprofit accounting solution in action.

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