Fund Accounting for Nonprofits: What Every Board Member Should Understand

If you sit on a nonprofit board or run day-to-day operations, you've probably seen the term "fund accounting" in your organization's financial statements without a clear explanation of what it actually means.

What fund accounting is

Fund accounting is a method of tracking resources by restriction rather than treating all revenue as one pool of money. Instead of a single "total cash" number, a nonprofit's books separate resources into categories such as:

• Unrestricted funds — money the organization can use for any purpose consistent with its mission
• Temporarily restricted funds — money donors or grantors have earmarked for a specific purpose or time period
• Permanently restricted funds — money, such as an endowment, meant to remain intact indefinitely

Why nonprofits are required to think this way

Unlike a for-profit business, a nonprofit is accountable to donors and grantors for how restricted contributions are used — not just for its overall profitability. Fund accounting is what makes it possible to answer a specific question like "how much of the grant we received in March has actually been spent on the program it was intended for?"

What this means for your financial statements

A nonprofit's Statement of Activities and Statement of Financial Position both reflect this structure. When fund accounting isn't set up correctly, it's common to see restricted and unrestricted funds blended together — which can make an organization's financial picture look wrong to a funder or auditor, even when nothing was actually spent improperly.

Getting it right

If your organization's books were originally set up by someone without nonprofit accounting experience, this is one of the most common places for structural errors to show up — and one of the first things worth reviewing before an audit or a new grant application.

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Montvera Advisory Group provides outsourced accounting and fund accounting services for nonprofit organizations in the Washington, DC area and nationwide. Schedule a free consultation to talk through your organization's setup.