Fund Accounting for Nonprofits: Definition & Key Concepts

Definition:

Fund accounting is a method nonprofits use to track and report financial resources according to their specific purposes or donor restrictions.

Fund accounting is a specialized accounting system used primarily by nonprofit organizations and governments. It separates resources into categories, or “funds,” to track incoming and outgoing funds according to their purpose and restrictions. Each fund is treated as its own entity with its own set of books, enabling organizations to ensure that money is used in accordance with donor stipulations, grants, or legal requirements. Fund accounting provides transparency and accountability by clearly showing how different streams of revenue are allocated and spent. This clarity is essential for reporting to stakeholders, regulatory bodies, and the public, helping nonprofits maintain trust and compliance.

Key Takeaways

Separates resources into distinct funds based on purpose or restrictions
Ensures compliance with donor and legal requirements
Improves transparency and accountability in nonprofit finances
Essential for accurate reporting to stakeholders

Why It Matters

Real World Example

Imagine a nonprofit that runs a food bank and a scholarship program. The food bank receives a grant specifically for purchasing groceries, while the scholarship program is funded by a separate donor. Using fund accounting, the nonprofit creates two separate funds: one for the food bank grant and one for scholarships. All income and expenses related to each program are tracked in their respective funds. When reporting to the grantor or donor, the nonprofit can clearly show that their contributions were used solely for the intended purposes, building trust and ensuring compliance.

Frequently Asked Questions

What is fund accounting?

Fund accounting is an accounting system that separates resources into different funds to ensure they are used according to donor or legal restrictions.

Why is fund accounting important for nonprofits?

It helps nonprofits maintain compliance, transparency, and accountability by tracking how money is allocated and spent for specific purposes.

Does Keela support fund accounting?

Yes, Keela allows users to allocate donations and expenses to specific funds, making it easier to manage multiple funding sources and comply with reporting requirements.

Fund Accounting