Fund accounting and reporting is a unique requirement for not-for-profit organisations and is one of the differences between charity and commercial business financial reporting. Understanding the different fund types and how the best to approach managing them is important for any treasurer and trustee.
Unlike commercial enterprises, not-for-profit organisations have to account for their income and expenditure by fund. For statutory reporting purposes those funds are grouped by type but for day-to-day management reporting, and a demonstration of good stewardship, it is important to track the information about what is going on for individual funds and better manage your cash flow.
A good way to understand fund accounting basics is to consider how we might operate in our own lives. As an example of how fund accounting works let us imagine that we have set aside 3 money boxes for different purposes: general spending, a holiday and repairing the car. As and when we can we put money into one of those boxes depending on what we have decided to do with that bit of money. When we go to the shop we’ll dip into the general spending box but not touch the others. Similarly when we’re ready to book our holiday or repair the car we will take the money from the appropriate box. The principle of fund accounting is no different. It can also have rules that you might apply, for example, you may decide that the holiday box is for that purpose alone and can’t be touched for any other reason.
Charities have to consider the same things with their money boxes which they call funds. How a fund is defined will depend on the grant makers’ and/or donors’ intention when making the gift.
Funds can be divided into two main categories:
Unrestricted Funds
Funds with no specific purpose defined. The trustees can spend money held in those funds for any charitable purpose of the charity.
Unrestricted funds are subdivided into two types:
- general
- designated
Usually not-for-profit organisations would only have a single ‘unrestricted-general’ fund. Should the trustees want to set aside some of that fund for a project then another fund(s) would be set up as an ‘unrestricted - designated’ fund(s). It is not necessary to create new funds for every project but it has been a common practice due to the limitations of software currently being used not able to differentiate projects within a fund. The more funds created the more complex the management of those funds will be.
Restricted Funds
Funds assigned for a specific charitable purpose, for example church roof repair or capital that must be invested. Law dictates that monies in those funds can only be spent for the purpose for which they were intended.
Restricted funds are subdivided into three types:
- restricted
- endowment capital
- endowment expendable
General restricted funds are those raised for a specific purpose and should be spent on that purpose within a ‘reasonable’ time. Under trust law charities are required to invest the assets of an endowment or retain them for the charity’s use.
Transfer of Funds
It is possible to move money between funds. A typical example would be to move resources from the unrestricted to restricted fund to cover a deficit. It is also possible to move monies from a restricted to unrestricted fund but it would have to be clearly demonstrated that the unrestricted fund had paid for something that should have been paid from the restricted fund and it was being reimbursed.
Reporting
Not-for-profit organisations are required, by law, to report for their funds by group in a Statement of Financial Activities report (SoFA report). That reporting can be either under an accrual basis or, for not-for-profits operating under £250,000 income, a receipts and payments basis.
Liberty Accounts implements fund accounting in a way that is more integrated and complete than Quickbooks and other commercial software. Liberty Accounts users can manage all aspects of the different fund types, handle fund transfers and are able to report their financial statements from within the system without exporting data to Excel.
Liberty Accounts includes free access to a Donor Ledger and Gift Aid management. It also delivers true fund accounting and reporting for charities with an account structure and naming that is appropriate for the sector - saving time with minimal customisation required.
