Fund accounting is a specialized method required for nonprofits. This in-depth guide covers its key facets - from regulations and donor trust to principles and defining qualities. Learn best practices for managing church and nonprofit finances.
Why Fund Accounting is Mandatory
The Financial Accounting Standards Board (FASB) requires nonprofits, including churches, to use fund accounting principles. This is not optional - it is the only acceptable method per generally accepted accounting standards.
Reasons include:
Legal Compliance - Following fund accounting guidelines ensures nonprofits meet regulations and avoid issues like loss of tax exemption status.
Donor Confidence - Tracking restricted donations instills trust that gifts are stewarded. This fosters sustained and increased giving.
Financial Integrity - Fund accounting enables robust reporting showing how resources are allocated. This supports audits and public oversight.
In short, fund accounting is critical for healthy church and nonprofit finances.
Core Accounting Principles to Know
Before diving into fund accounting nuances, some key accounting fundamentals bear reviewing:
Accounting mirrors real-life financial transactions - tracking inflows, outflows, assets, liabilities, and net balances over time.
Key components include assets, liabilities, revenue, expenses, and net worth. Understanding these core elements is crucial.
Accounts have "normal balances" - assets as debits, liabilities as credits, etc. This helps categorize transactions.
The chart of accounts lists all tracked accounts and enables reporting.
While similar in concept, "funds" and "accounts" serve different purposes in nonprofit accounting.
Learning these basic building blocks provides a foundation for grasping fund accounting.
Defining Fund Accounting
Fund accounting uses "self-balancing" funds to track restricted and unrestricted resources and measure accountability.
Key aspects:
Each fund tracks associated assets, liabilities, revenues, and expenses independently.
Fund balances carry forward each year; they do not reset to zero like for-profit net income.
Independent fund accounting enables detailed reporting on how specific donations or grants are used.
This structure provides transparency that churches and donors rely on. Software systems designed for fund accounting for churches are essential.
Who Needs to Understand Fund Accounting
While finance staff maintain the mechanics of fund accounting, other roles should grasp its core concepts:
Church Leaders - Assess financial health and probe specific funds when reviewing statements and making spending decisions.
Pastors - Speak about church finances and stewardship principles when interfacing with the congregation and the public.
Donors - Gain confidence their gifts are tracked and utilized as intended when reviewing financial reports.
A working knowledge benefits anyone involved in church management or oversight. Make fund accounting basics part of board and staff training.
Differentiating Accounting Funds and Donor Funds
Robust nonprofit financial software contains two distinct fund types:
Accounting funds - Track all income and expenses. Used for general ledger activity and financial reporting.
Donor funds - Record only donation income. Used for stewardship tracking and donor reporting.
While integrated, these serve different purposes. Understanding each fund type's use and restrictions is key for accurate accounting.
Fund accounting does need some unique nonprofit-focused understanding. But mastering its core principles enables churches and nonprofits to meet legal standards, build donor trust, and report finances. Take time to learn fund accounting fundamentals - the investment will pay dividends for years to come.
