As the name implies, fund accounting is the management of a specific sum of money to achieve a particular purpose. Although, It is common with public sector and nonprofits, it is now used by companies to manage a particular kind of funding for a project. This article discusses the meaning and importance of fund accounting.
1. What's fund accounting
1a It is defined as the accounting system of managing one or more kinds of funding for a particular project. Fund accounting is used by the government and nonprofits organization to group funds provided by donors, etc to ensure accountability and transparency. Here, different funds are accounted for differently with their separate income statements and financial positions.
1b. Nonprofits such as charity and religious organizations usually receive findings from donors both locally and internationally. They receive the funds for various purposes. As a result, they ensure that each fund is in their different baskets referred to as “the fund”. For example, a charity organization may receive funding for taking care of elderly, eradicating poverty, and so on. Each of the money received is treated separately.
1c. This is also true with governments and their parastatals. The world bank, other international organizations, and foreign governments provide fundings to them. They also organize the money received into various funding baskets. In budgeting, the federal and state government is known to have several funds accounting such as the consolidated revenue and contingency funds.
1d. The goal of fund accounting is to ensure transparency and accountability. Therefore promoting not only stewardship but responsibility accounting. Finance professionals practicing this form of accounting are referred to as fund accountants. Private sector entities may also practice a form of this type of accounting system. This can be in the form of keeping funds for a particular project that might take more than one year.
2. Importance of fund accounting
Below are some importance of fund accounting in an organization.
2a Stewardship
Fund accounting ensures stewardship. That is, it ensures the avoidance of mismatch between donors and their agents. Funds relating to a particular donor are kept in a separate basket from those of others. Therefore, the agents (that is nonprofits and government parastatals) can give accounts to each donor.
2b. Transparency and accountability
One peculiar importance of fund accounting is transparency. It enables tracing of transactions relating to each donor's resources and how they are spent. Therefore, any fraud can be detected as they occur.
2c. Appraisals
Since each fund is managed separately, the nonprofit or parastatals can appraise them. The funds can be monitored based on financial and nonfinancial indicators. Then, it can be compared with planned strategies to know if the organization is achieving their goals and objectives.
2d. Comparability
Funds in one organization can be compared with those of other organizations. Also, several related and unrelated fund accounts can be compared. This will enable the fund accountant to know the funds that are yeilding good or bad results and report the same to the board of trustees.
2e. Decision making
Fund accounting ensures control of donors’ resources. It also makes sure that the board of trustees in the nonprofits, ministers, DGs, etc of government establishments makes decisions based on the information available from the various findings.
3. Accounting for funds
In fund accounting, separate fund baskets or accounts are kept by the fund accountant. A unique report is prepared and presented for each of the funds. This includes the income statement and a statement of financial position. This is to ensure transparency and accountability. In addition, a combined report is prepared as well to show the overall financial activities that took place on the nonprofit or parastatal.
4. Conclusion
In final words, fund accounting is all about stewardship which ensures transparency, accountability and responsibility of those saddled with donors' funds. The money or resources are managed in various funds and accounted for separately before they are combined in a consolidated report.
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