Fund Accounting

Fund Accounting: How Does it Work?

Government organizations have different objectives, financial structures, restraints, and requirements than for-profit organizations. It also means their financial management needs are different as well.

For-profit businesses use accounting to assess their profitability. Local governments and school districts use accounting specifically for accountability—to assess whether the organization has used its funds to achieve its mission and goals.

For example, both local governments and school districts have legal obligations to demonstrate to taxpayers and government entities that the funds they have been given have been used for the exact purpose for which they were given.

Tax revenue, endowments, gifts, donated services, and other nonrevenue sources of income all come with strings attached. Fund accounting software can account for all these various strings, restraints, and reporting requirements.

What is Fund Accounting?

Fund accounting is an accounting system used within an organization to record and track the use of financial resources that are limited by a donor, governing agency, grant authority, or other law.

Using this method, an organization will track different funds located in individual self-balancing accounts that have varying degrees of restrictions based on the provider-defined purpose of those funds.

Each fund requires a separate balance sheet, account, and set of rules for its use. The money in each account can only be used for its intended purpose.

For example, a local government could receive taxpayer revenue that is specifically designated for street repairs. These funds cannot be used for schools, police, or sewage treatment. They must be used for street repairs.

With government fund accounting, the local government agency would assign this fund its own expense, income, asset, liability, and equity balances to manage the inflow and outflow of money from this specific fund according to the rules dictating its use.

Why is Fund Accounting Important?

There are multiple reasons fund accounting is important, many of which we have already addressed. To summarize, fund accounting (especially fund accounting software) for nonprofit organizations is important because:

  • It enables accountability by removing the focus on profit and placing it instead on tracking and reporting where money was spent.
  • It allows organizations to make the best use of limited resources.
  • It facilitates third-party reporting about the use and preservation of resources (such as a charity organization reporting to donors, a school reporting to government agencies, etc.).
  • It increases control and accuracy when comparing expenditures and operational results by determining whether the funds have been used for their intended purpose.
  • It avoids triggering a deficit.
  • It demonstrates compliance.
  • It isolates assets so that they can be used for specific purposes and prevents funds from mixing with other accounts.
  • It allocates funds exactly where they need to go while tracking all cash flow.
  • It prepares your organization for an audit.
  • It balances funding sources.
  • It reduces human error because it automates much of the accounting, which also lowers operational costs.
  • It increases transparency and makes data more accessible, improving collaboration and increasing forecasting accuracy.

Fund Accounting Challenges Faced by School Districts and Local Governments

Charities, hospitals, governments, churches, artistic foundations, colleges, and local school districts are among the many nonprofit organizations that use fund accounting.

Government fund accounting can become complicated due to the variety of organizations within a community. Funds must be dispersed to each specific need, agency, or project. Bureaucracy also creates many hurdles such as compliance reporting, regulations, restrictions on fund usage, and more.

Government funding can also change due to partisan politics, putting a strain on budgets, and increasing the demands on government fund accountants. Having reliable fund accounting software for local government is essential to manage this constantly changing landscape.

Fund accounting for schools is demanding as well, although the challenges are more generalized. If not done correctly, schools can fail to properly determine needs, make the wrong financial decisions, and even face penalties for those mistakes.

Without fund accounting software, schools can struggle to find weaknesses in the system, work too slowly to track and manage funds or conduct improper accounting. Administrative control weaknesses can also lead to the wrong personnel handling the organization’s sensitive information.

Fund Accounting Basics: Best Practices and Guidelines

To address and prevent these issues, both school and government fund accounting must perform the following fund accounting basics:

  • Conduct an audit of the current fund accounting
  • Identify fund accounting procedures and internal controls.
  • Educate and train staff on proper procedures and use of fund accounting software.
  • Perform regular risk assessments and inspections.
  • Require reporting and then examine departmental reports to identify weaknesses.
  • Set up fund categories for unrestricted net assets, permanently restricted net assets, and temporarily restricted net assets.

Accountability Over Profitability

For local governments and schools, the focus is on accountability rather than profitability. The objective is to allocate money toward the local government or school district’s goals and to manage using the money with which the organization has been funded where terms like loss and profit are replaced with deficit and surplus.

To achieve this, it is crucial to have the right fund accounting software. Fund accounting software for nonprofits can help your organization stay compliant and maintain the kind of transparency that will satisfy donors, taxpayers, governing agencies, and other sources of funding.

This will ensure that those funds continue to show up in your bank account long-term to fuel your organization’s mission well into the future.

The RDA ERP systems software provides K12 School Districts and Local Governments with decades of flawless experience with implementing, instructing, and automating the various requirements of Fund Accounting.


About RDA

RDA’s innovative ERP software provides meaningful transparency and access for your community and staff, along with powerful insights into data. The RDA Solution is hosted in the Cloud, providing regular backups, product updates, and concierge support, ensuring that clients feel confident and are successful with their new software.


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