Fund accounting is an accounting system emphasizing accountability rather than
profitability, used by non-profit organizations and governments. In this
system, a fund is a self-balancing set of accounts, segregated for specific
purposes in accordance with laws and regulations or special restrictions and
limitations. The label, fund accounting, has also
been applied to investment accounting, portfolio accounting or securities
accounting – all synonyms describing the process of accounting for a portfolio of
investments such as securities, commodities and/or real estate held in
an investment fund such as a mutual fund or hedge fund. Investment accounting,
however, is a different system, unrelated to government and nonprofit
fund accounting. Overview
Nonprofit organizations and government agencies have special requirements to
show, in financial statements and reports, how money is spent, rather than
how much profit was earned. Unlike profit oriented businesses, which use a
single set of self-balancing accounts, nonprofits can have more than one
general ledger, depending on their financial reporting requirements. An
accountant for such an entity must be able to produce reports detailing the
expenditures and revenues for each of the organization's individual funds, and
reports that summarize the organization's financial activities
across all of its funds. A school system, for example, receives a
grant from the state to support a new special education initiative, another
grant from the federal government for a school lunch program, and an annuity to
award teachers working on research projects. At periodic intervals, the
school system issues a report to the state about the special education
program, a report to a federal agency about the school lunch program, and a
report to another authority about the research program. Each of these programs
has its own unique reporting requirements, so the school system needs
a method to separately identify the related revenues and expenditures. This
is done by establishing separate funds, each with its own chart of accounts.
State and local government funds State and local governments use three
broad categories of funds: governmental funds, proprietary funds and fiduciary
funds. Governmental funds include the
following. General fund. This fund is used to
account for general operations and activities not requiring the use of
other funds. Special revenue funds are required to
account for the use of revenue earmarked by law for a particular purpose. State
and federal fuel tax revenues require special revenue funds, because federal
and state laws restrict these taxes to transportation uses.
Capital projects funds are used to account for the construction or
acquisition of fixed assets, such as buildings, equipment and roads.
Depending on its use, a fixed asset may instead be financed by a special revenue
fund or a proprietary fund. A capital project fund exists only until
completion of the project. Fixed assets acquired and long-term debts incurred by
a capital project are assigned to the government's General Fixed Assets and
Long-Term Debts. Debt service funds are used to account
for money that will be used to pay the interest and principal of long-term
debts. Bonds used by a government to finance major construction projects, to
be paid by tax levies over a period of years, require a debt service fund to
account for their repayment. The debts of special assessment and proprietary
funds are serviced within those funds, rather than by a separate debt service
fund. Permanent funds account for public
infrastructure improvements financed by special levies against property holders.
Sidewalk and alley repairs often rely on special assessments.
Proprietary funds include the following. Internal service funds are used for
operations serving other funds or departments within a government on a
cost-reimbursement basis. A printing shop, which takes orders for booklets
and forms from other offices and is reimbursed for the cost of each order,
would be a suitable application for an internal service fund.
Enterprise funds are used for services provided to the public on a user charge
basis, similar to the operation of a commercial enterprise. Water and sewage
utilities are common examples of government enterprises.
Fiduciary funds are used to account for assets held in trust by the government
for the benefit of individuals or other entities. The employee pension fund,
created by the State of Maryland to provide retirement benefits for its
employees, is an example of a fiduciary fund. Financial statements may further
distinguish fiduciary funds as either trust or agency funds; a trust fund
generally exists for a longer period of time than an agency fund.
= Fixed assets and long-term debts = State and local governments have two
other groups of self-balancing accounts which are not considered funds: general
fixed assets and general long-term debts. These assets and liabilities
belong to the government entity as a whole, rather than any specific fund.
Although general fixed assets would be part of government-wide financial
statements, they are not reported in governmental fund statements. Fixed
assets and long-term liabilities assigned to a specific enterprise fund
are referred to as fund fixed assets and fund long-term liabilities.
= Basis of accounting = The accrual basis of accounting used by
most businesses requires revenue to be recognized when it is earned and
expenses to be recognized when the related benefit is received. Revenues
may actually be received during a later period, while expenses may be paid
during an earlier or later period. Governmental funds, which are not
concerned about profitability, usually rely on a modified accrual basis. This
involves recognizing revenue when it becomes both available and measurable,
rather than when it is earned. Expenditures, a term preferred over
expenses for modified accrual accounting, are recognized when the
related liability is incurred. Proprietary funds, used for
business-like activities, usually operate on an accrual basis.
Governmental accountants sometimes refer to the accrual basis as "full accrual"
to distinguish it from modified accrual basis accounting.
The accounting basis applied to fiduciary funds depends upon the needs
of a specific fund. If the trust involves a business-like operation,
accrual basis accounting would be appropriate to show the fund's
profitability. Accrual basis is also appropriate for trust funds using
interest and dividends from invested principle amounts to pay for supported
programs, because the profitability of those investments would be important.
= Financial reporting = State and local governments report the
results of their annual operations in a comprehensive annual financial report,
the equivalent of a business's financial statements. A CAFR includes a single set
of government-wide statements, for the government entity as a whole, and
individual fund statements. The Governmental Accounting Standards Board
establishes standards for CAFR preparation.
Governments do not use the terms profit and loss to describe the net results of
their operations. The difference between revenues and expenditures during a year
is either a surplus or a deficit. Since making a profit is not the purpose of a
government, a significant surplus generally means a choice between tax
cuts or spending increases. A significant deficit will result in
spending cuts or borrowing. Ideally, surpluses and deficits should be small.
Federal government funds Federal government accounting uses two
broad groups of funds: the federal funds group and the trust funds group.
= Federal funds group = General fund. Technically, there is just
one general fund, under the control of the United States Treasury Department.
However, each federal agency maintains its own self-balancing set of accounts.
The general fund is used to account for receipts and payments that do not belong
to another fund. Special funds are similar to the special
revenue funds used by state and local governments, earmarked for a specific
purpose. Revolving funds are similar to the
Proprietary funds used by state and local governments for business-like
activities. The term, revolving, means that it conducts a continuing cycle of
activity. There are two types of revolving funds in the Federal Funds
Group: public enterprise funds and intragovernmental revolving funds.Public
enterprise funds are similar to the enterprise funds used by state and local
governments for business-like activities conducted primarily with the public. The
Postal Service Fund is an example of a public enterprise fund.
Intragovernmental revolving funds are similar to the internal service funds
used by state and local governments for business-like activities conducted
within the federal government. = Trust funds group =
Trust funds are earmarked for specific programs and purposes in accordance with
a statute that designates the fund as a trust. Its statutory designation
distinguishes the fund as a trust rather than a special fund. The Highway Trust
Fund is an example of trust funds. Trust Revolving Funds are business-like
activities, designated by statute as trust funds. They are, otherwise,
identical to public enterprise revolving funds.
Deposit funds are similar to the agency funds used by state and local
governments for assets belonging to individuals and other entities, held
temporarily by the government. State income taxes withheld from a federal
government employee's pay, not yet paid to the state, are an example of deposit
funds. = Accounting basis and financial
reporting = The United States government uses
accrual basis accounting for all of its funds. Its consolidated annual financial
report uses two indicators to measure financial health: unified budget deficit
and net operating/revenue. The unified budget deficit, a cash-basis
measurement, is the equivalent of a checkbook balance. This indicator does
not consider long-term consequences, but has historically been the focus of
budget reporting by the media. Except for the unified budget deficit, the
federal government's financial statements rely on accrual basis
accounting. Net operating/revenue, an accrual basis
measurement, is calculated in the "Statements of Operations and Changes in
Net Position" by comparing revenues with costs. The federal government's net
operating/revenue is comparable with the net income/(loss) reported on an income
statement by a business, or the surplus/(deficit) reported by state and
local governments. Nonprofit organizations
Nonprofit organizations generally use the following five categories of funds.
Current fund – unrestricted. This fund is used to account for current assets
that can be used at the discretion of the organization's governing board.
Current funds – restricted use current assets subject to restrictions assigned
by donors or grantors. Land, building and equipment fund. Cash
and investments reserved specifically to acquire these assets, and related
liabilities, should also be recorded in this fund.
Endowment funds are used to account for the principal amount of gifts the
organization is required, by agreement with the donor, to maintain intact in
perpetuity or until a specific future date or event.
Custodian funds are held and disbursed according to the donor's instructions.
= Basis of accounting and financial reporting =
The Report of Consolidated Financial Statements, used for annual financial
reporting by nonprofit organizations, is similar to the CAFR used by state and
local governments. However, nonprofit organizations use accrual basis
accounting for their funds. A nonprofit's financial statements
generally include the following. Statement of financial position or
balance sheet. Similar to the balance sheet of a business, this statement
lists the value of assets held and debts owed by the organization at the end of
the reporting period. Statement of activities or statement of
support, revenue and expenses. This statement resembles the income statement
of a business, but uses the terms excess or deficit rather than profit or loss.
It shows the net results, by each fund, of the organization's activities during
the fiscal year reported. The excess or deficit is applied as a change in fund
balances, rather than an increase or decrease in owner's equity.
Statement of functional expenses distributes each expense of the
organization into amounts related to the organization's various functions. These
functions are segregated into two broad categories: program services and
supporting services. Program services are the mission-related activities
performed by the organization. Non-program supporting services include
the costs of fund-raising events, management and general administration.
Statement of Cash Flows identifies the sources of cash flowing into the
organization and the uses of cash flowing out during the reported fiscal
year. Standards for nonprofit financial
statements are set by the Financial Accounting Standards Board. The Board's
most recent proposal, announced to the public on April 22, 2015, could
establish new standards for financial performance and liquidity information
available to donors and lenders. Fund accounting fiscal cycle
The following is a simplified example of the fiscal cycle for the general fund of
the City of Tuscany, a fictitious city government.
= Opening entries = The fiscal cycle begins with the
approval of a budget by the mayor and city council of the City of Tuscany. For
Fiscal Year 2009, which began on July 1, 2008, the Mayor's Office estimated
general fund revenues of $35 million from property taxes, state grants,
parking fines and other sources. The estimate was recorded in the fund's
general ledger with a debit to Estimated Revenues and a credit to Fund Balance.
An appropriation was approved by the city council, authorizing the city to
spend $34 million from the general fund. The appropriation was recorded in fund's
general ledger with a debit to Fund Balance and a credit to Appropriations.
In subsidiary ledgers, the appropriation would be divided into smaller amounts
authorized for various departments and programs, such as:
The complexity of an appropriation depends upon the city council's
preferences; real-world appropriations can list hundreds of line item amounts.
An appropriation is the legal authority for spending given by the city council
to the various agencies of the city government. In the example above, the
city can spend as much as $34 million, but smaller appropriation limits have
also been established for individual programs and departments.
= Recording revenues = During Fiscal Year 2009, the city
assessed property owners a total of $37 million for property taxes. However, the
Mayor's Office expects $1 million of this assessment to be difficult or
impossible to collect. Revenues of $36 million were recognized, because this
portion of the assessment was available and measurable within the current
period. = Payroll expenditures =
The city spent a total of $30 million on its employee payroll, including various
taxes, benefits and employee withholding. A portion of the payroll
taxes will be paid in the next fiscal period, but modified accrual accounting
requires the expenditure to be recorded during the period the liability was
incurred. = Other expenditures =
The Public Works Department spent $1 million on supplies and services for
maintaining city streets. = Closing entries =
At the end of the fiscal year, the actual revenues of $36 million were
compared with the estimate of $35 million. The $1 million difference was
recorded as a credit to the fund balance.
The city spent $31 million of its $34 million appropriation. A credit of $3
million was applied to the fund balance for the unspent amount.
When the current fiscal period ended, its appropriation expired. The balance
remaining in the general fund at that time is considered unexpended. City
government agencies are not allowed to spend the unexpended balance, even if
their expenditures during the now-ended fiscal period were less than their share
of the expired appropriation. A new appropriation is necessary to authorize
spending in the next fiscal period. Instead of re-applying the unspent
balance from the general fund to the same programs, the city council may
choose to spend the money on other programs. Alternatively, they may use
the balance to cut taxes or pay off a long-term debt. With a large surplus,
reducing the tax burden will normally be the preferred choice.
See also Federal Accounting Standards Advisory
Board Governmental Accounting Standards Board
Permanent fund References
External links John R. Throop. "Fund Accounting—Making
sense of church finances". Christianity Today. Retrieved 2010-03-15.
State of Maryland Comprehensive Annual Financial Report, FY 2013 Example of
financial statements prepared by a state government.
Tim Riley. The Accountancy Model See chapters 15–19 for a quick reference to
journal entries and math useful for state and local government fund
accounting. The "Funds Characteristics Tree" on p. 191 illustrates
relationships between funds. Statement of Federal Financial
Accounting Concepts 5 Federal Accounting Standards Advisory Board. Definitions of
elements and basic recognition criteria for accrual-basis financial statements
for federal agencies. For an example of nonprofit financial
reporting, see the Consolidated Financial Statements of the American
National Red Cross for the fiscal year ended June 30, 2010.