As with any organization, money is held in a variety of accounts that meet both legal and logistical requirements. For all entities, there may be a legal burden to show precisely how money has been spent and how it is being held in trust. Nonprofits, however, often have multiple funds, or accounts, that hold various amounts of money to be used in specific, and often legally restricted, ways. There are often further legal requirements to provide reports of specific funds, or of all of the funds as a whole, which can make proper accounting a challenge.
The system of having a variety of accounts that hold various pools of money is called fund accounting. Each account funds a specific type of expense, and as a whole these funds make up the financial portfolio of the organization. With more accounts, however, comes a greater chance of accounting errors. To address this concern, fund accounting uses self-balancing accounts to ensure that all money coming in and out of a specific account is properly recorded.
A self-balancing account uses software to ensure that all transactions are properly offset and recorded, thereby balancing the accounts without the need for human intervention. For example, if an expense is recorded, the software automatically makes the proper offset entry to account for it. By making this a software process that happens without intervention, it eliminates the possibility of human error. There is no chance that the wrong account could receive an entry, or that one would never be recorded at all.
While it is common for any organization to have a variety of accounts to meet different needs, it can be much more complicated for a nonprofit to keep funds separate. There may be donations, grants, annuities, and many other pools of money that can only be used in specific ways, and each of these legal obligations is taken very seriously. For nonprofits, there are commonly five types of funds, and within each type there may be any number of specific accounts depending on where the money came from and what it is to be used for.
- Current Fund (restricted): these funds are current assets, and must be spent in accordance with the wishes of the donor or the terms of the grant from which the funds were received.
- Current Fund (unrestricted): current assets where the organization can decide how the money is to be used.
- Endowments: a principal is held in perpetuity or for a specific purpose, and the account must show how this money is being held intact.
- Custodian Fund: money that is held and then used per specific donor requests.
- Land, Building, and Equipment Fund: money and investments to be used for both the acquisition and the liabilities involved in these specific areas.
Few nonprofits have the ability or resources to develop their own financial software, so fortunately there are many programs available on the market. From programs meant for smaller entities to packages built to be used with the largest and most complicated fund accounting systems, proper research can help any nonprofit find the right software for their specific needs.
Some of the most commonly used software for nonprofit organizations:
- The Financial Edge
- Intacct Financials and Accounting System
- Abila Fund Accounting
- Microsoft Dynamics (NAV, AX, or GP)
- SAP Accounting
- Oracle JD Edwards
What will the nonprofit be needing tomorrow? It is important to keep expected growth of the organization in mind. Features that an entity may not be using this year may become useful or even necessary in a reasonable amount of time, so it is also important to fully think through the functionality that the software will allow not just now, but also in the future. Fund accounting software is a necessary expense, but it can be costly, so ensuring that the right choice is made the first time can save money and headaches down the road.
Fund accounting is how nonprofit organizations control and keep track of their assets. Keeping all of these accounts clean and ready for reporting, however, can be a challenge. Fortunately, with the proper software, any nonprofit can streamline their financial recordkeeping and report generation. Through proper fund accounting, the organization can create greater transparency while showcasing their ability to properly steward the funds they have been given.