Nonprofits will often have funds for their various programs and activities. To keep track of the finances for all of these funds, it is useful to use a technique known as fund accounting.
In their book “Best of Boards,” Marci Thomas and Kim Strom-Gottfried define fund accounting as the process that separates assets, liabilities, and fund balances into separate accounting units that are either associated with activities or objectives.
Fund accounting is mainly used for internal reporting but in 1996, accounting literature recommended nonprofits present accounting information for external reporting purposes. Every organization’s fund will have specific assets that need to be accounted. Thomas and Strom-Gottfried list examples of eight funds, and the roles they play. This information will give you a better idea of what information you will need to report:
- Endowment funds account for endowments or amounts permanently restricted by donors and the activity related to those assets;
- Plant and equipment funds account for materials designated for those purposes;
- Debt service funds account for payments on the debt of the organization;
- Restricted purpose funds account for funds held for specific purposes designated by donors;
- Agency funds account for funds held for other organizations;
- Split interest funds account for split interest arrangements;
- Loan funds account for loans made to students, employees, or other parties; and,
- Operating funds account for general operations.