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Fund Accounting is an accounting system used by nonprofit organizations, particularly governments.
Overview
Because there is no profit motive for nonprofit businesses and governments, accountability is measured instead of profitability. The main purpose is stewardship of financial resources received and expended in compliance with legal requirements. Financial reporting is directed at the public rather than investors. The accounting equation is: Assets = Liabilities + Fund Balance (or Fund Equity). Funds are established to ensure accountability and expenditure for designated purposes. Revenues must be raised and expended in accordance with special regulations and restrictions. Budgets are adopted and recorded in the accounts of the related fund. Contractual obligations are given effect in some funds.
Governmental Generally Accepted Accounting Principles (GGAAP)
The objective of financial reporting should be the basis for determining specific accounting principles used by a governmental entity. There are 11 principles of accounting and reporting applicable to municipal governments, developed by the National Council on Governmental Accounting (NCGA). These principles are summarized below as stated in NCGA Statement 1 (Governmental Accounting and Financial Reporting Principles):
- Principle 1:Accounting and Reporting Capabilities. A governmental accounting system must make it possible both (a) to present fairly and with full disclosure the financial position and results of financial operations of the funds and account groups of the governmental unit in conformity with generally accepted accounting principles; and (b) to determine and demonstrate compliance with finance-related legal and contractual provisions.
- Principle 2:Funds Accounting Systems. A specific governmental unit is not accounted for through a single accounting entity. Instead, the accounts of a government are divided into several funds and nonfund account groups. The NCGA defines a fund as "a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities and balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations."
- Principle 3: Types of Funds and Account Groups. NCGA recommends the following categories and types of funds and account groups:
- The General Fund, used to pay the regular operating and administrative expenses not properly accounted for in other funds.
- The Special Revenue Fund, used to account for the proceeds of specific revenue sources that are legally restricted to expenditure for specified purposes.
- The Capital Projects Fund, used to account for financial resources earmarked for the acquisition or construction of major capital facilities and improvements.
- The Debt Service Fund, used to account for the payment of principal and interest on long-term general obligation bond issues and other long-term debt.
- Principle 4:Number of Funds. A government should have only one General Fund, one General Fixed Account Group, and one General Long-term Debt Account Group. It may have one, none, or several of the other types of funds, depending on its activities. Only the minimum number of funds consistent with legal and operating requirements should be established.
- Principle 5:The Budget and Budgetary Accounting. (a) An annual budget should be adopted by every governmental unit, whether required by law or not; (b) the accounting system should provide budgetary control over general governmental revenues and expenditures, (c) Budgetary comparisons should be included in the appropriate financial statements and schedules for governmental funds for which an annual budget has been adopted.
- Principle 6:Valuation of Fixed Assets. Fixed Assets should be accounted for at original cost, or at the estimated cost if the original cost is not available, or, in the case of gifts, at the appraised value as of the time received.
- Principle 7:Depreciation of Fixed Assets.
- Principle 8:Basis of Accounting.
- Principle 9:Classification of Accounts.
- Principle 10:Common Terminology and Classification. A common terminology and classification should be used consistently throughout the budget, the accounts, and the financial reports.
- Principle 11:Financial Reporting. Financial statements and reports showing the financial position, operating results, and other pertinent information should be prepared periodically to control financial operations. At the close of each fiscal year, a comprehensive annual financial report covering all funds and financial operations of the governmental unit should be prepared and published.Joel G. Siegel, Ph.D, Accounting, Barron's Educational Series, Inc 2006
Notes
"Fund Accounting"