Eric Adjei 57 Questions 81 Answers 16 Best Answers 5 Points View Profile 0 Eric Adjei Asked: December 28, 20202020-12-28T13:54:05+00:00 2020-12-28T13:54:05+00:00In: Public Sector Accounting What is fund accounting in government? 0 What is fund accounting in government? what is fund accounting in government? Share Facebook 1 Answer Voted Oldest Recent Biney 32 Questions 3 Answers 3 Best Answers 42 Points View Profile Best Answer Biney 2020-12-28T14:04:24+00:00Added an answer on December 28, 2020 at 2:04 pm What is fund accounting in government? Fund accounting is the way governments track revenues with purpose restrictions against the expenditures made for those g p purposes. • Fund accounting makes it easier to identify which monies are available for specific purposes. Fund-based accounting, or fund accounting, is a system used by nonprofit organizations and government agencies to manage their money. Fund accounting differs in purpose from the system used in regular for-profit businesses because the goal is to maintain accountability and track how funding is used rather than monitor the profitability of a company. Whether associated with a nonprofit or a donor who contributes to a variety of charities, learning about fund accounting will help you understand the financial structure of these types of organizations. Who Uses Fund Accounting? Because the purpose of fund accounting is to manage donations, funding from outside sources or income from fundraising, organizations that do not operate for profit use this accounting method. Some entities that might use this system include: Charitable organizations Churches or religious institutions Government agencies or governments Nonprofit nursing homes or hospitals Educational institutions Foundations for the arts Budgets, Programming and Fundraising When a nonprofit sets up its fund structure, it creates a separate fund for each major division or function within the organization. Examples of funds may include: General fund: Used for routine management expenses of the organization. Fixed asset fund: Used for maintenance of buildings, expansion of facilities, equipment, etc. Fundraising: Funds used to raise additional income, maintain donor relations, etc. Program funds: Used for carrying out the programs and services of the organization. Within each of these funds there can be subcategories that are coded and tracked separately. For example, a church may have a variety of programs offered to several groups of people, such as Children’s Programming, Family Activities or Community Outreach. Each group would have its own subcategory within the Program Fund. Once a budget is established, each group would be allocated a specific amount of money that they could spend on their programs throughout the year. As the year progresses, money spent by each group would be recorded in the appropriate fund. Assuming that the accounting ledger is kept up to date, at any time during the year, a manager of that group’s funds should be able to see exactly how much money has been spent, what it was spent on and how much money remains in the fund. This type of detailed accounting helps members stick to the budget, while ensuring that funds are spent carefully for each designated purpose. Types of Fund Categories Within fund accounting there are two types of funds, restricted and unrestricted, each of which determines how and when money can be spent. 1. Restricted funds: Funds that are restricted are typically designated for a specific purpose by the donor or foundation awarding a grant. Funds must only be put into the specifically designated fund and then used only for that purpose. For example, if a donor gives $5,000 for the purchase of new computers, the money cannot be used to purchase only a few computers and then also new desks and chairs. Restricted funds exist in two forms. Temporarily restricted funds: These funds are often either for a specific purpose or for use during a specific period of time, say within one year. They may be raised during a specific campaign for a designated purpose, and even incorporate a wide usage. For instance, during a capital improvement campaign when an organization hopes to expand its building, purchase new furniture and upgrade equipment, there are a variety of needs it may communicate to its donors. Anyone giving to that campaign should expect that their donation will only go toward those specific expenditures. Permanently restricted funds: Funds that carry a permanent restriction from the donor are never depleted but continue indefinitely. These endowment funds function as investment accounts, where the donation earns interest. Revenue earned from these funds is allowed to be spent to meet the organization’s needs, but the initial donation amount may not be touched. 2. Unrestricted funds: Money within this category can be used for any need within the organization. These funds may be put into a general operating fund or designated for other specific funds at the discretion of the managing board. Funds that are unrestricted can also be moved around if there is a need in a specific area. Balances in each of these funds will also need to be reported on year-end IRS forms for organizations exempt from paying income tax. The information return, IRS Form 990, is the way nonprofit organizations report on their financial activities, maintain compliance with federal regulations and show accountability to the public. These returns are open to public inspection. Rules for Donations When donors give a gift to a nonprofit organization, they should specify whether they have any restrictions to place on the funds. This is usually done in the form of a gift letter. However, if a donor does not specify how the money must be used, then the organization is free to distribute the donation among any of its funds as it sees fit. Bank Accounts and Fund Accounting Fund accounting, although a specialized system for keeping track of internal spending, does not require any specialized banking rules. An organization does not need to maintain separate bank accounts for each of its funds within the nonprofit; individual accounts would involve much more work and costs. To keep it simple, all of the organization’s cash can be stored in one bank account. It is only the tracking of that money that needs to be broken down into segments. The only exception to this might be funds that are part of a permanently restricted endowment fund. In this situation, a monetary gift is invested in a separate interest-bearing vehicle. The interest that is accumulated is allowed to be used for the nonprofit’s needs as designated, but the principle must remain invested. Grant Compliance and Reporting Timely and accurate reporting of how funds are used is essential for nonprofits that receive grant money from foundations or other organizations. Almost all grants require that the recipients make detailed reports on how the gifted money was spent. They must also provide details on how the gift affected the organization’s programs and goals. For that reason, all expenses must be recorded in the appropriate fund. Failure to accurately record grant money and then properly report on how it is spent could not only jeopardize future grant contributions, but also a nonprofit’s tax-exempt status. Specialized Software for Fund Accounting While is it not strictly necessary to use accounting software specifically designed for a nonprofit, software with unique features designed to meet the needs of a nonprofit may prove helpful. Terminology in the programs often aligns with nonprofit lingo, and many packages offer features that help to track donations, create budgets by fund and issue donor letters. However, do your research before making a purchase to ensure that you will get the features you need without paying for extras that will not truly benefit you. source: smallbusiness.chron.com 0 Reply Share Share Share on Facebook Share on Twitter Share on LinkedIn Share on WhatsApp Leave an answerLeave an answerCancel reply Featured image Select file Browse Save my name, email, and website in this browser for the next time I comment.