Guide to Fund Accounting for Educational Institutions

guide to fund accounting for educational institutions

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Jump to a Chapter  
  • Chapter 1: The Benefits of Fund Accounting
  • Chapter 2: How to Choose the Right Accounting Software
  • Chapter 3: Do you Have a Weak Fund Accounting System
  • Chapter 4: Educational Industry Fund Accounting Best Practices
  • Accounting is complex for any educational institution. From child care centers to prestigious universities, the accounting process requires close attention to detail and dedication to students. At MIP Fund Accounting®, our accounting software for educational institutions enhances the financial management experience.

    What Is Fund Accounting and When Is It Used?

    Nonprofit organizations use a system of accounting known as fund accounting to track the amount of money assigned to various purposes and the usage of that money. Since nonprofits are not trying to generate a profit, the focus of fund accounting for nonprofits is accountability. Anyone running a nonprofit or educational institution must have enough information to make informed decisions about the best use of limited resources and have ways to report to third parties about how those resources are being used and preserved.

    Some nonprofits may use several funds, with each requiring a separate balance sheet and set of accounts. Separating funds this way allows users to determine whether the money has been used for the intended purpose. For instance, a local government may have separate funds for schools, police, street repairs, and sewage treatment.

    Fund accounting restricts the use of specific funds. By only using the money for its intended purpose, an organization can maintain better control and more accurately compare the expenditures to the operational results. Fund accounting also allows your supporters to evaluate how well your organization is meeting its goals and helps ensure you avoid triggering a deficit.

    What Is the Difference Between Fund Accounting and Regular Accounting?

    The difference between fund accounting and regular accounting is that fund accounting is mainly used for nonprofit and government organizations, while regular accounting is used in for-profit organizations. Instead of liabilities and assets, fund accounting uses fund balances. Fund accounting can be more complex than regular accounting, which makes finding the right fund accounting solution crucial for educational institutions and nonprofits.

    What Is the Purpose of Fund Accounting?

    Many entities use fund accounting, such as charities, hospitals, governments, churches, artistic foundations, and colleges. With fund accounting, your school can demonstrate compliance and accountability. For example, an organization could have governmental funds, proprietary funds, and fiduciary funds. The following funds may fall under the governmental fund category:

    • General fund: This fund tracks the organization’s financial resources that are not reported in other funds.
    • Permanent funds: This fund is for financial resources with earnings that can only be used to support government programs.
    • Debt service funds: This fund accounts for money intended to cover principal and interest.
    • Capital projects funds: This fund tracks money intended to be used for capital outlays.
    • Special revenue funds: This fund is for the proceeds from targeted revenue sources with a commitment for expenditures that are not capital projects or debt services.

    On the other hand, fiduciary funds are used for reporting assets held for the organization’s benefit. The following funds are included in the category of fiduciary funds:

    • Agency funds: Also known as custodial funds, these report on financial resources held in a custodial capacity in which funds are received, invested temporarily, and then remitted.
    • Investment trust funds: These funds report an investment pool’s external portion by the sponsoring government.
    • Private-purpose trust funds: These funds report on trust arrangements in which private organizations, other governments, and individuals are the beneficiaries.
    • Employee benefit trust and pension funds: This type of fund reports on assets held for employee benefit plans, pension plans, and other post-employment benefit plans.

    Our wide range of solutions can help your institution ensure trustworthy fund governance and connect with students. Features of our fund accounting software include:

    With MIP®, you can make school fund accounting easier for your administrators. You can allocate funds, support students’ needs, and create budgets with our single software solution.
     

    Chapter 1: The Benefits of Fund Accounting for Educational Institutions

    Fund accounting can serve various purposes and offer several benefits to nonprofits and organizations in the education sector. Nonprofit organizations are under pressure to ensure that their financial status is well understood, and fund accounting can help.

    What Is Different About Fund Accounting?

    Private nonprofits are becoming increasingly dependent on financial markets for funds. As such, nonprofits need to maintain satisfactory bond ratings and credit to get capital funds. However, this can be difficult, as capital markets can view many nonprofit organizations as risky.

    Nonprofit organizations are under pressure to ensure managers, board members, and taxpayers understand their financial status. While adopting financial statement reporting and business accounting procedures could tackle the challenges that nonprofits face, choosing fund accounting is generally a better option. The benefits of fund accounting in educational institutions and other nonprofits include the following:

    • Nonprofits have different objectives than for-profit organizations, so similar formats could be misleading and misdirect someone evaluating the nonprofits’ financial management.
    • Nonprofits and businesses have different financial structures.
    • Nonprofit financial managers should be familiar with the organization’s unique requirements and accounting practices rather than depend on their familiarity with financial accounting and administration associated with businesses.
    • Nonprofits have faced difficulties due to weaknesses in accounting controls, not accounting principles.

    Our school fund accounting software is an accounting solution designed specifically for nonprofits like educational institutions.

    When Should You Use Fund Accounting?

    Fund accounting is used daily in nonprofit organizations. Managing funds from different sources can quickly become complex and overwhelming. For example, if you apply for a grant that offers $7,000 to be spent on certain expenditures, and you receive this money via a check that you deposit into a checking account with a balance of $5,000, you would have to make a few considerations. 

    You will need to determine how you will record the receipt of the $7,000 grant, how you will record the expenses you use the grant money to cover, and whether you will know how much money remains in the account at any given time. 

    You can easily address these concerns with fund accounting, as your system will ensure the fund has its own asset, expense, liability, income, and equity balances. This system will make each fund a separate entity, and you can easily view simple information for your entire organization or each individual fund.

    What Are the Benefits of Fund Accounting Software?

    While for-profit businesses use financial reporting to determine profitability, nonprofits use financial reporting to ensure assets support the organization’s mission and goals. Educational institutions, in particular, can enjoy several advantages by using fund accounting software. Benefits of fund accounting software include:

    • Accountability: Donors can keep organizations accountable via financial statements, ensuring the organization is utilizing donations properly. Every contributor wants to know that a nonprofit serves individuals who need assistance. At the end of the fiscal year, the nonprofit issues financial statements that donors can view to assess the performance of every fund. The organization’s financial statements demonstrate the money each fund receives and how the nonprofit distributes these funds.
    • Asset isolation: With fund accounting, you can isolate assets to meet a designated purpose. Fund accounting separates account balances according to purpose and prevents funds from mixing with the organization’s other accounts, ensuring that assets assigned to a fund are available for the intended purpose.
    • Allocation system: With a powerful allocation system, you can efficiently manage every dollar.
    • Cash flow tracking: To reduce the risk of fraud, you can track all of your organization’s cash flow.
    • Prepare for an audit: With fund accounting software, your educational institution can efficiently and accurately prepare for an audit.
    • Balance funding sources: You can easily identify and balance your various funding sources. This is a crucial function for nonprofits.
    • Built-in reports and dashboards: The built-in reports and dashboards are configurable and allow your educational institution to customize the financial management process. Your fund accounting software should be able to deliver reports that demonstrate responsible spending. A fund accounting system with several sophisticated reporting options and customization capabilities can give your organization the advantage it needs.
    • Transparent compensation tools: Employees will be grateful for the transparent, easy-to-use compensation tools available. 
    • Ability to create unlimited budget scenarios: Create as many budget scenarios as you need to scale your financial management as your organization grows.
    • Reduce human errors: Since fund accounting software automates so many steps, your organization can reduce the number of human errors in calculators.
    • Lower operational costs: You can reduce labor costs by centralizing information and automating specific tasks. If your school’s resources are limited, you cannot afford to have staff spending their precious time entering data manually across multiple systems. When you centralize information in a single software, your team can work more efficiently.
    • Greater accessibility: Shifting from manual methods to accounting software can improve accessibility, making it easier for staff to enter information and collaborate on tasks. As a result, this is especially beneficial for schools purchasing this software for the first time and have been solely using manual methods. School districts with multiple campuses will especially find a fund accounting software solution valuable due to the increased accessibility compared to paper-based recordkeeping. 
    • More accurate forecasting: Using a single system can help you prepare accurate financial forecasts and generate more precise results. Since disparate systems can result in non-standardized data, fund accounting software can be a worthwhile investment if you want more accurate, standardized data.

    At MIP Fund Accounting®, we understand that managing your organization’s funding is essential for transparency, accountability, and success.

    What Is the Rationale for Fund Accounting?

    Fund accounting exists to help trustees meet their legal obligations to use every fund according to the guidelines. Nonprofits rely on nonrevenue sources for funds like donated services, endowment income, and gifts, all of which could have constraints for use.

    Trustees have a legal obligation to secure funds and keep them available for certain purposes, even after the funds are spent. For example, if an educational institution receives a gift for construction, proceeds from the construction’s eventual sale may not be available for general purposes. Additionally, they may need to give a portion of the sale’s proceeds to the donor.

    While businesses often rely on retained earnings or debt alone, nonprofits’ capital expenditures also receive funds through capital fund drives or appropriations. The organization’s administrator treats managing the capital budget as a different financial planning responsibility. The organization also maintains the capital budget as a special fund.

    Nonreciprocal sources of revenue like gifts require creating an entity that organizations manage separately. For instance, if a graduating college class raises $15,000 to establish a scholarship, the restricted balance sheet would include:

    • Cash: $15,000
    • Scholarship fund balance: $15,000

    When the school awards a $5,000 scholarship to a student, this amount becomes tuition revenue, and the school records it as a transfer to an unrestricted fund. They then update the restricted balance sheet to:

    • Cash: $10,000
    • Scholarship fund balance: $10,000

    In this case, the scholarship fund has given this money to the student, who then pays it to the college. Fund accounting gives the college control over the amount available in the account and the assets it can use for a specific purpose.
     

    Chapter 2: How to Choose the Right Accounting Software

    Previously, bookkeeping was a paper-based process that involved a ledger and countless columns to record the essential financial data of an organization. However, in the digital age, every organization can benefit from fund accounting software regardless of size. With accounting software, you can reduce human error and gain insights into your organization that you wouldn’t be able to with a paper version.

    What Is Fund Accounting Software for Educational Institutions?

    Fund accounting software for schools and universities integrates student records with an accounting system. By consolidating students records into a single, centralized database, you can improve efficiency, minimize confusion, and avoid duplicates in data entry. Accounting software for educational institutions can also track funds intended for school-specific considerations and procedures like textbook tracking, retention rates, student fee registration and processing, and educational forecasting and budgeting.  

    At MIP®, our fund accounting software for educational institutions enhances your financial management and offers various solutions that ensure trustworthy fund governance.

    How to Choose the Right Accounting Software for Your Organization

    Any organization can benefit from utilizing the proper accounting software. You can gain insights into your organization, generate forecasts, rate services, and find previously overlooked items. Finding the right accounting software for your organization can be challenging. To choose the right software, you should consider your software options and identify your organization’s accounting needs.

    Consider Your Accounting Software Options for Schools and Colleges

    You should identify what accounting software options may be a good fit for your organization. For example, if you run a small primary school, your best options will differ from those of a large university.

    • Management software: Software programs for management offer more features but also tend to be more expensive. Functions include inventory control, billing, customer relationship management, enterprise resource management, and purchasing.
    • Payroll software: You may want to invest in accounting software to help you manage payroll. You can buy many software programs online or off the shelf and have the accounting tools and reports needed for your payroll.
    • Web-hosted accounting options: Some online applications can offer effective accounting solutions for nonprofits. The model of software in the cloud is growing and can help you manage your finances.

    Free accounting software options are also available, though many of these programs do not offer the features and functions that nonprofit organizations need. While free software or the free version of paid software may have some useful features, free accounting software doesn’t cater to the needs of nonprofits. 

    The option that works best for your organization depends on your specific needs and goals, so weigh the pros and cons of each option available to you.

    Determine Your Organization’s Accounting Needs

    To choose the right accounting software for your organization, you need to understand your accounting needs. Assess both your financial and managerial needs, along with your projections for the future. Good planning can help your organization avoid needing to change software too quickly.

    • Understand your organization: The type of nonprofit you operate will impact your accounting needs. Different sectors have add-on packages or specialized modules to keep specific data types. For example, a school might require accounting software to handle inventory and labor, while a hospital requires programs to bill insurance companies.
    • Write a wishlist: Include a list of must-have features, nice-to-have features, and features you can live without to help you throughout your search. Using trial versions of your software options can help you determine which features are must-haves and which features you can live without.
    • Determine your budget limitations: Identify how much you’re willing to spend on software before shopping. The more features and functions your organization requires, the more expensive the software may be. The right accounting software is worth the investment, but the cost should also be in your budget. 
    • Speak with your accountant: If you already have an accountant, speak with them about your organization and accounting needs. They may be able to point you in the right direction and may even be willing to help you set up the new accounting software so it gathers the data they need to file your taxes. 
    • Discuss with associates or consultants: Knowing what other organizations in your industry are using can be helpful. You can discuss your options in a business association meeting or with your accountant, who likely has other clients in your industry. Alternatively, you may want to speak with a consultant who can help you narrow down your choices.

    Your budget will also impact whether an option is right for you. For example, if your organization is small with a limited budget, you may opt for a lower-end solution. Note that lower-end does not mean lower quality — rather, you are opting for a solution that doesn’t support as many functions as a more robust system. These accounting systems typically cannot handle significant monetary figures and cannot consolidate checks for several invoices. Depending on budget and size, this trade-off may be worth it for the lower cost.

    You can use many accounting software options temporarily for free via a demo or trial. Try out the different software options you are considering to determine which may be the right one for your organization.

    Choose Your Preferred Deployment Option

    Another aspect of selecting the right accounting software for your organization is choosing your preferred deployment option. 

    • Pick an on-premise or cloud-based system: Some educational institutions prefer an on-premise system if they have IT staff who can maintain the servers because an on-premise system can be easier to customize. However, many institutions choose a cloud-based system, also called Software-as-a-Service (SaaS), because they do not need to purchase or maintain a server, as the servicing company hosts it remotely. Additionally, you can access a cloud-based software solution anywhere you have an internet connection.
    • Select a perpetual or subscription license: A subscription license requires periodic payments while you pay for a perpetual license with an upfront lump sum. The number of users on your system could affect the pricing.

    Remember that cloud-based systems tend to require subscription licenses, while on-premise software is usually available under a perpetual license. Ultimately, your choice depends on your organization’s needs and budget. 

    Best Accounting Software for Educational Institutions

    By consolidating records into a single centralized database, you can minimize confusion, improve efficiency, avoid duplicates in data entry and save time. Look for the following features in accounting software for educational institutions:

    • Student records: You need a robust solution that can integrate student information with accounting for the extensive, crucial data associated with student records. Manage many types of student information in one system, including class schedule, extra-curricular activities, and grades.
    • Fund accounting: Fund accounts are self-balancing and designed to record liabilities, cash, and related assets and balances. For educational entities, fund accounting helps track expenditures back to a specific source, ensuring that donations are used for their designated purposes.
    • Financial reporting: Fund accounting software should also help you create financial statements that track funds from grants, pledges, and donations, along with measuring donor retention and fundraising performance. Seek features like automatic records transmission and customization.
    • Grant management: The best accounting software for educational institutions will also have a grant management feature, allowing your organization to process funds, allocate funds to recipients properly, and keep track of proposals and awards. 
    • Point-of-sale system: A point-of-sale system can help a school track sales, manage cash operations, and improve speed and accuracy service for the items sold on campus, such as meals in the cafeteria.
    • Multiple expense ledgers: These self-balancing and self-contained ledgers are designated for a specific donation, grant, or project.  
    • Online registration and payment: Accounting software also allows students to register and pay for their classes online. Registration can also be tied directly to student records.
    • Facility and inventory management: Schools handle various inventory types, including textbooks, computers, desks, sports equipment, and classroom supplies. Along with physical assets, school property and buildings require ongoing maintenance and repairs. Being able to track these details allows your school to manage assets and prevent loss.
    • Donor and fundraising management: With fund accounting software, you can securely solicit, manage, and collect donations via several fundraising campaigns and channels. Additionally, your organization can recruit prospective supporters and manage existing donor sources. 

    Self-balancing fund ledgers tend to be most appropriate for nonprofit educational organizations, so you should prioritize those in your search. To evaluate education accounting software, consider the following:

    • Whether the software includes fund accounting ledgers
    • Whether you want a subscription license or a perpetual license
    • Whether you want cloud-based software or an on-premise system
    • Whether the software can maintain student records in a large centralized database 
    • Whether there are convenient tools for student fee processing and course registration

    The school fund accounting software from MIP® can offer your educational institution the features and functions you need. If your college or university requires a simple option for improving fundraising efforts, we can provide you with the most effective solution.

    Chapter 3: Do You Have a Weak Fund Accounting System?

    Everyone involved in a nonprofit organization must perform their duties reliably, securely, and efficiently, particularly when it comes to financial transactions. Internal control can ensure all the processes meet your organization’s expectations, which means identifying any internal control weaknesses like a weak fund accounting system.

    Weakness in a fund accounting system could mean the effectiveness or implementation of the internal controls has failed. If your organization has a weak fund accounting system, your organization could be at risk, even with strong security measures in place.

    What Is System Weakness?

    A system weakness refers to a deficiency in your organization’s accounting system. System weakness could lead to a higher risk of transactions being incorrectly reported and recorded. As a result, you could face a more expensive audit, as auditors will be more likely to expand audit procedures to accurately assess whether financial statements fairly represent your organization’s financial results, cash flows, and position.

    Weaknesses in an accounting system can include technical control weaknesses, administrative control weaknesses, operational control weaknesses, and architectural control weaknesses.

    • Technical control weaknesses: The focus of technical security control is on software and hardware. Usually, weakness in your organization’s technical control framework stems from hardware or software failures or changes made to your technology.
    • Administrative control weaknesses: Also known as procedural controls, administrative security controls are policies and procedures you put in place to ensure personnel handle your organization’s sensitive information properly. With these controls, everyone involved understands how the organization should be operating and how they should be conducting everyday operations.
    • Operational control weaknesses: Typically, weaknesses in operational control result from human error. Operational controls in an organization can become weak when staff fail to follow standards and policies while conducting operations. Incident response must happen as quickly as possible, so the sooner you respond, the greater your chance of reducing the impact on your organization.
    • Architectural control weaknesses: With security architecture, you typically establish an integrated framework that addresses and highlights risks in your organization’s IT environment. If these weaknesses are present, they may damage your organization’s overall security structure. Since employees may try to bypass the typical change management process due to improper configuration or implementation issues, an unplanned hardware replacement could be a high risk for weakness in architectural control.

    To avoid the negative impact of having a weak fund accounting system, you need to know how to identify a weak system.

    How to Identify Weakness in an Accounting System

    Weakness in your accounting system could spell trouble for your nonprofit organization. As a result, you should understand how to recognize a weak system. Follow the steps below to identify weaknesses in your accounting system:

    • Conduct an audit: Conducting an internal audit of your organization involves cash reconciliation and asset inventories. With cash reconciliation, you verify that the amount of cash your organization owns is accurate compared to your expenditures and incoming cash. If you audit accounts payable, you should ensure that each payment goes to the proper organization or individual and cross-reference payments against external and internal financial statements.
    • Educate and train your team: Staff should be educated about modern internal control methods and processes, as internal controls frequently evolve. Let your team know when any changes occur and train them regularly. Lack of training and knowledge among staff is one of the main reasons internal controls fail.
    • Perform a risk assessment: Your organization should perform a risk assessment on your internal control procedures. Organizations typically complete risk assessments in table form, with every new risk on a row. Pinpoint the most likely failures within your organization. When examining every risk, add columns that indicate what may go wrong, why this would happen, who will be in charge in that process, who inspected the risk, what the solutions are, and when the person in charge took action.
    • Perform inspections regularly: Additionally, you should ensure you monitor your organization’s internal control staff. The individual performing the internal control typically develops the risk assessment, which is why it is crucial to conduct external inspections and monitor these individuals. Automated internal audits that use software are an excellent way to check the organization’s controls in real-time. A third party can pinpoint potential weaknesses during an external inspection. Typically, an outside auditing company will perform an external inspection. 
    • Examine your departmental reports: Examine your organization to look for areas that are either not improving as expected or becoming worse. Though another factor could cause these issues, they could also signify an internal control failure. Although every department can monitor and control what it does, you must make sure that your departmental reports are linked to reflect the entirety of your organization. Review every department to determine whether a method is in place to report internal control weaknesses.
    • Review feedback from other interested parties: When you receive feedback from other parties interested in your organization’s success, review for any common complaints like breaches of internal control. 
    • Identify your system’s procedures for internal controls: This step involves documenting product design, product testing, internal auditing, purchasing procedures, and financial transactions. Before you can properly inspect your organization’s procedures, you should know what you will be facing. Try to identify the parts of your organization that could be at greater risk than others. Additionally, assess your controls’ design, including documentation, training, feedback, and the segregation of duties.

    If you’ve identified that your fund accounting system is weak, you can implement a new system that will work for your nonprofit organization.

    Implementing a Fund Accounting System

    Fund accounting gives a code to every transaction. Assigning these codes helps your organization track expenses and revenue and meet your goals. To enjoy these benefits, you will need to implement a true fund accounting software solution for nonprofits. Here are the steps involved in implementing a fund accounting system:

    1. Set up net assets with no donor restrictions: Your first step is to set up the unrestricted fund, also known as the operating fund or general fund. This fund refers to your net assets without donor restrictions and is key to your organization’s financial mission.
    2. Set up net assets with donor restrictions: Next, set up the restricted funds, including donations with restrictions. You should use these assets as the donor intended, though you may be able to use earned revenue for carrying out ongoing activities.
    3. Shape your ideal solution with MIP®: With MIP Fund Accounting®, you can customize your fund accounting system to meet your school’s specific needs. Choose the core modules and features you want to include and add modules as your institution grows, allowing you to track and report the financial information that is the most important for your organization, your supporters, and your board. With our software, you can keep sensitive data secure and compliant with federal regulations.
    4. Request a demo: When you’re ready to try our fund accounting solution, request a demo to see MIP® in action. We will reach out soon to schedule a product tour for you. 

    Once you’re ready to implement a fund accounting system into your educational institution, contact us at MIP Fund Accounting®.

    Chapter 4: Educational Industry Fund Accounting Best Practices

    You can support your nonprofit and propel your organization forward by maintaining a strong reserve ratio. To ensure your organization’s success, you need to be certain that you track your reserve fund activities properly and spend your restricted funds and operating reserve appropriately. You’ll also want to organize your transactions and documentation involving restricted funds in preparation for an audit. To help your organization’s fund accounting succeed, you should understand the basic principles and best practices.

    Basic Principles of Fund Accounting

    Basic principles of fund accounting exist to ensure the proper documentation of revenues and expenses. These basic principles will guide your educational institution in your accounting practices. The basic principles of fund accounting include:

    • Fund categories: With fund accounting, you can categorize different funds in various ways. In nonprofit fund accounting, you can consider unrestricted net assets, permanently restricted net assets, and temporarily restricted net assets. The assets determine where the nonprofit’s money goes and the timing for fund distribution.
    • Required reporting and oversight: Like for-profit businesses, nonprofit organizations prepare accounting reports to submit to various government agencies. Investment fund accounting uses different standards from nonprofit or government fund accounting due to the different entities that receive report accounting information from the organization.
    • Accountability rather than profitability: For nonprofit organizations, fund accounting focuses on accountability rather than profitability. The terms deficit and surplus are used rather than loss and profit, as making money is not a nonprofit’s purpose. Since nonprofits get funding from several sources, fund accounting recognizes the outgoing and incoming cash by reporting funds individually by source or fund. It also maintains a separate general account for adding the outgoing and incoming cash from all the different sources or funds.

    Follow these basic principles of fund accounting to keep your nonprofit organization successful.

    Fund Accounting Principles for Nonprofit Organizations

    The specific fund accounting principles vary by institution type. Government organizations, for example, have different fund accounting principles than educational institutions. In general, fund accounting principles for nonprofit organizations include:

    • Fund accounting is used to measure and record donations.
    • Donations were received on a nonreciprocal basis and unconditionally given.
    • Nonprofits must prepare accounting reports to submit to government agencies.
    • The nonprofit recognizes conditional promises to give only if they meet the donor’s conditions.
    • The nonprofit records all received contributions at fair value, which means the market’s current selling or asking price. If a selling price for this asset does not exist, the nonprofit can make an estimate based on the current selling price of a similar asset or an independent appraisal.
    • A received contribution does not need to be recognized as an asset if all valuation techniques are exhausted and significant uncertainty of the item’s value continues.
    • Any income from the donation is considered part of the donation.
    • Disbursements are recognized in the inclusive period during which they were incurred rather than on the date of payment.
    • Donated funds received are treated like the nonprofit organization’s revenue during the period they were acquired. These funds will also be booked as contributions received.
    • Contributions received without a record of any donor-imposed restrictions will be categorized as unrestricted support under contributions received within the nonprofit’s financial reports.

    Fund Accounting Best Practices

    Nonprofit organizations receive unreciprocated or unconditional asset transfers or funds from another entity. These funds are transferred either directly or via an intermediary so the organization can perform a humanitarian mission and benefit the community or environment they serve. To uphold the organization’s integrity and assure the donors, a nonprofit should implement a fund accounting system and best practices to ensure the system’s success. Sticking to fund accounting best practices will allow your institution to:

    • Properly track reserve fund activities.
       
    • Ensure you spend your restricted funds and operating reserves appropriately.
    • Organize and account for transactions and documentation involving restricted funds.

    Follow these fund accounting best practices to meet these responsibilities:

    1. Get Your Team on the Same Page

    To run a nonprofit organization successfully, you need your entire team to be on the same page. By keeping each person in the loop, you can ensure that everyone has a clear understanding of how to track your various funds and how they can be used.

    Fixing ongoing errors after they occur can be costly and painful. For example, if your bookkeeper does not understand how to track the expenses or income for the funds, you may struggle to undo the damage later. To get your team on the same page, follow the steps below:

    • Train staff on coding reserve fund-related expenses before using the funds.
    • Review fund transactions each month to catch reporting and accounting errors early.
    • Gather all reporting requirements and restrictions for all funds in a single central document, allowing your team to refer to this document as needed.

    2. Utilize Class Tracking Functionality

    Nonprofit organizations with several restricted funds or operating reserve funds should use the fund accounting method for reporting purposes. By using the class tracking functionality, you can ensure funds are used properly per any restrictions, capture expenses and revenues relating to specific funds, and eliminate the disorganized bookkeeping that can occur when the right controls and processes are not in place.

    Class tracking functionality can help you stay accountable and streamline reporting obligations. You can generate profit and loss statements and organize them by class for board members and funders, making it easier to review the expenses and revenues for specific funds.

    3. Review Your Fund Transactions Each Month

    One of the aspects of effectively managing reserve funds involves ensuring balances are sufficient for achieving a fund’s purpose. When you review your nonprofit organization’s transactions each month, you can:

    • Keep your books up-to-date and accurate over the long term.
    • Confirm that you are using funds according to their restrictions.
    • Make sure staff are not coding transactions to the wrong categories or classes.

    If someone makes an allocation error, catching it early will help your team correct it and prevent mistakes from happening in the future.

    4. Establish Separate Investment and Bank Accounts

    By setting up separate accounts that your nonprofit can use for regular banking, you can easily track expenses and interest income related to specific funds. Using separate investment and bank accounts provides many benefits:

    • Reduces ambiguity
       
    • Improves reporting accuracy
    • Makes the process of monthly reconciliation more straightforward
    • Lets you more effectively capture transactions in the appropriate classes

    5. Use a Single Central Document for a Funds Summary

    You can use a single central document to summarize all of your nonprofit organization’s funds. Creating a document to summarize your funds can help keep the reporting requirements and restrictions for separate funds clear to staff and management. However, instead of depending solely on documentation to guide your organization’s spending, you may want to make sure everyone understands the fund restrictions at a transactional level. This single central document can allow your nonprofit organization to maintain consistency in preparing and recording your financial reports. 

    MIP® provides fund accounting software that is perfect for nonprofits and educational institutions.

    Request a Demo for School Fund Accounting Software

    At MIP Fund Accounting®, we can meet your fund accounting needs of today, tomorrow, and the future. Our industry-leading fund accounting solution can provide comprehensive financial oversight and help your educational institution achieve its goals. Nonprofits raise more than $1 billion each year using our software solution and other software from Community Brands. Our fund accounting software includes: 
     

    • Dashboards
    • Fixed assets
    • General ledger
    • Encumbrances
    • Forms designer
    • Advanced security
    • Bank reconciliation
    • Electronic requisitions
    • Employee web services
    • Human resource management
    • Accounts payable and receivable
    • Unlimited budgeting and forecasting
    • Integrated payroll and benefit enrollment

    MIP® is a fund accounting system built specifically for nonprofit organizations and government entities to support the complexity of financial management inherent to their structure. We offer organizations an adjustable chart of accounts designed to record and report on various funding sources. When you equip your educational institution with a fund accounting solution, you can better engage donors, improve financial decision-making, and operate more efficiently. 
     

    The features of our software solution will allow your school to:
     

    • Streamline HR management: You can improve your institution’s human resource management from an integrated fund accounting system.
    • Scale with your organization’s needs: Every nonprofit and educational institution has unique needs. Fortunately, with add-on functionality influenced by your practices and a multidimensional chart of accounts, you can keep using the same system as your organization grows.
    • Track each dollar from start to finish: With a fund accounting solution, you can monitor your finances with ease and navigate the myriad complexities of funding requirements, multiple revenue sources, audit preparation, and compliance and reporting standards.
    • Use custom reporting to adapt to change: With the ability to select cloud or on-premises deployments, you can meet your organization’s needs even as they change.

    Don’t have a strong fund accounting system in place yet? If you’re looking for school activity fund accounting software, request a demo today to see MIP® in action. When you’re ready to discuss our solution with a team of experts, get in touch.
     

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