Fund accounting is a specialized accounting system used by nonprofits and government entities to manage resources. It focuses on accountability rather than profitability, ensuring that funds are used for their intended purposes. Each fund is a self-balancing set of accounts, which means every fund has its own assets, liabilities, revenue, and expenses.
1. Recording Donations in a Restricted Fund
Nonprofits often receive donations that are restricted for specific purposes, like building a new facility or funding a specific program.
Example 1: Recording a Restricted Donation
Scenario: A nonprofit receives a $10,000 donation on January 15, 2024, restricted for a scholarship fund.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-15-2024 | Cash | 10,000 | |
| 01-15-2024 | To Restricted Contributions Revenue | 10,000 |
Explanation:
- Cash will debited to reflect the receipt of the donation.
- Restricted Contributions Revenue will credited to reflect the increase in restricted funds.
2. Recording Expenses from a Restricted Fund
When the nonprofit uses the restricted funds for their intended purpose, an expense is recorded.
Example 2: Using Restricted Funds for Scholarships
Scenario: The nonprofit awards $2,000 in scholarships on March 1, 2024, using the restricted fund.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 03-01-2024 | Scholarship Expense | 2,000 | |
| 03-01-2024 | To Cash | 2,000 |
Explanation:
- Scholarship Expense will debited to recognize the use of the funds.
- Cash will credited to reflect the payment.
3. Transferring Funds Between Different Funds
Sometimes, a nonprofit might need to transfer money from one fund to another, for example, from the general fund to a restricted fund.
Example 3: Transferring Funds from General Fund to Building Fund
Scenario: On April 1, 2024, $5,000 is transferred from the general fund to the building fund for a renovation project.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 04-01-2024 | Transfer Out (General Fund) | 5,000 | |
| 04-01-2024 | To Cash (General Fund) | 5,000 | |
| 04-01-2024 | Cash (Building Fund) | 5,000 | |
| 04-01-2024 | To Transfer In (Building Fund) | 5,000 |
Explanation:
- Transfer Out will debited to reflect the decrease in the general fund.
- Cash (General Fund) will credited to reduce cash in the general fund.
- Cash (Building Fund) will debited to reflect the increase in cash in the building fund.
- Transfer In will credited to reflect the increase in the building fund.
4. Recording Pledges Receivable
When a donor pledges a donation to be received in the future, it is recorded as a pledge receivable.
Example 4: Recording a Pledge Receivable
Scenario: A donor pledges $20,000 on July 1, 2024, to be received in equal installments over the next four years for the general fund.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 07-01-2024 | Pledges Receivable | 20,000 | |
| 07-01-2024 | To Contributions Revenue (General Fund) | 20,000 |
Explanation:
- Pledges Receivable will debited to recognize the promised donation.
- Contributions Revenue will credited to recognize the revenue, even though it will be collected in the future.
5. Allocating Overhead Costs
Nonprofits often allocate indirect costs like administration or fundraising across various funds.
Example 5: Allocating Administrative Expenses
Scenario: The nonprofit allocates $3,000 of administrative expenses to the general fund, restricted fund, and endowment fund on a percentage basis (50%, 30%, and 20%, respectively) on August 31, 2024.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Administrative Expense (General Fund) | 1,500 | |
| 08-31-2024 | Administrative Expense (Restricted Fund) | 900 | |
| 08-31-2024 | Administrative Expense (Endowment Fund) | 600 | |
| 08-31-2024 | To Cash (or Accounts Payable) | 3,000 |
Explanation:
- Administrative Expenses will debited across the respective funds.
- Cash (or Accounts Payable) will credited to reflect the payment or liability.
6. Recording Endowment Contributions
Endowment contributions are donations where the principal amount is kept intact, and only the income generated from the investment is used.
Example 6: Recording an Endowment Contribution
Scenario: A nonprofit receives $50,000 on October 1, 2024, as an endowment, which is to be invested, and only the earnings are to be used.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 10-01-2024 | Cash | 50,000 | |
| 10-01-2024 | To Endowment Contributions Revenue | 50,000 |
Explanation:
- Cash will debited to reflect the receipt of the donation.
- Endowment Contributions Revenue will credited to record the endowment.
These journal entries help ensure that funds are properly tracked and that each fund’s resources are used as intended. This approach supports the transparency and accountability essential for nonprofits.