- Posted by Liesa Malik
- On August 5, 2023
Fund accounting is a specialized form of accounting that is primarily used by not-for-profit organizations and government entities. It differs from for-profit accounting in several ways:
- Separate reporting requirements: Not-for-profit organizations have specific legal and reporting requirements that they must adhere to. This includes reporting to funding sources, providing transparency to members and patrons, and tracking financial performance against grant budgets. For-profit companies, on the other hand, do not have the same level of reporting requirements to external parties.
- Separate chart of accounts: In fund accounting, a separate chart of accounts is maintained for each fund. This allows for the tracking and reporting of financial data by fund and by net asset class. For-profit systems may maintain separate revenue and expense accounts, but they typically co-mingle balance sheet accounts.
- Different terminology: The terminology used in fund accounting statements is different from that used in for-profit balance sheets and income statements. This is due to the unique financial requirements enacted by organizations such as the Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB), and the International Public Sector Accounting Standards.
- Grant reporting and administration: Not-for-profit organizations often rely on grants and funding from external sources. This requires tracking and reporting on current, grant calendar, and life-to-date financial performance, which is not typically required in for-profit systems. Additionally, expenses need to be tracked against both grant budgets and organization budgets.
To effectively manage the financial operations of a nonprofit organization, it is important to have accounting software that is specifically designed to meet the unique needs of fund accounting. Cloud-based accounting software, such as Tangicloud’s Fundamentals industry solution for Microsoft Dynamics 365 Business Central provides the necessary features and functionality to ensure transparency, security, and efficiency in financial management.