Think back to a time when you’ve donated to your favorite charity or non-profit. Have you ever been curious about what happens to that money once you’ve clicked the “donate now” button? In non-profit organizations, fund accounting tracks and budgets those donations allocated to specific purposes.
Fund Accounting Explained
According to “The Purpose of Accounting,” an excerpt from Robert Davis’s book Fund Accounting Policies, “Fund accounting refers to the management and allocation of revenue an organization acquires through donations, tax payments, grants and other public and private sources.” Fund accounting is quite literally its own special form of accounting; it is used to track and manage the spending of money allocated for certain purposes within an organization.
In a non-profit, a fund is an area within your organization that needs to be tracked separately from other monetary sources. Examples of funds are:
- Missions funds
- Building funds
- Scholarship funds
Fund Accounting Simplified
While fund accounting can seem complicated to understand, simply think of it as a sub-specialty within accounting. In the same excerpt by Robert Davis, he says, “The basic idea behind fund accounting is to monitor and document the use of assets that are acquired from outside parties.” Simply put, in a “for-profit” company, accounting is used to track profitability; in a non-profit organization, the purpose of fund accounting is to maintain accountability and manage the funds that are obtained through donations and other sources.
The next time you donate to your favorite charity, remember that the process of allocating that money to the appropriate fund is more complicated than just clicking a button. With the knowledge obtained in this article, you can move forward with your donations with a newfound appreciation of fund accounting and what it entails.