What is Fund Based Accounting?
Accounting for funds, sometimes known simply as fund accounting, is a method of financial management used by charitable organisations and government entities. Accounting for funds has a different objective than accounting done in ordinary for-profit firms, which is maintaining accountability and keeping track of how money is utilised.
How Does Fund-based Accounting Work?
It contrasts with the accounting done in regular businesses, which monitors a company's profitability. Learning about fund accounting is beneficial whether you are affiliated with a nonprofit organisation or a donor who gives to different charities since it will help you understand the capital situation of many organisations. When the nature of the subscription account, they agree to make recurring monthly, quarterly, or annual financial contributions to the NPO.
Example of Fund-based Accounting
Fund accounting aims to handle contributions, financing from outside sources, or revenue from fundraising activities. The following are some examples of possible users of this system:
Charitable organisations and institutions
Sacred places of worship or religious establishments
Regulatory bodies or administrative governments
Hospitals and nursing facilities run by nonprofit organisations
Establishments devoted to education
Building blocks for artistic endeavours
What is a Subscription Account?
In the case of a non-profit group, the primary way they make money is through subscriptions. A member's subscription is the amount of money they pay to the organisation regularly to keep their membership. Members can pay it every month, every three months, every six months, or every year. In the Receipts and Payment Account, it will show up on the Receipts side after any subscription-related changes have been made.
When figuring out the number of subscriptions for the current period, advance subscriptions received for the current period in the previous period and outstanding subscriptions for the current period are added to the subscription received during the current period. On the other hand, the advance subscription received for the next accounting period during the current period and the outstanding subscription for the preceding period are subtracted from the subscription received during the current period.
Characteristics of Fund-based Accounting
The Elements of Fund-based Accounting
In the following paragraphs, we will discuss the essential aspects of fund-based accounting:
Since the fund is handled and accounted for independently, its unique assets, liabilities, revenues, and expenditures must be kept track of.
A limited fund must be established for any organisation that receives legally prohibited money from being used for any purpose.
Typically, it is utilised by groups that do not seek financial gain.
As government grants, private donations, and corporate sponsorships make up most of a nonprofit organisation's operating budget, these funds must be handled lawfully.
All transactions about the special fund should be recorded on a fund-by-fund basis, with account consolidations included in the financial statement for the convenience of readers.
Fund-Based Accounting's Goals and Objectives
The following is a discussion of the purposes that fund-based accounting serves:
Examine and contrast the actual financial results of the various activities with those planned for in the budget
To thoroughly analyse the not-for-profit organisation's financial performance throughout the fiscal year
To guarantee that the guidelines, regulations, and stipulations of the law are adhered to appropriately
To guarantee that the money is used following the guidelines
To maintain a record of both income and expenditures
To evaluate how effectively money was spent on initiatives given the go-ahead
The assets of a nonprofit organisation, minus its debts, create its capital fund. All of the organisation's regular operations can be carried out thanks to this fund, which was established through generous contributions, grants, and gifts.
Such a fund is distinct from designated funds because it is not established to serve a particular objective.
Summary
In fund-based accounting, recurring and one-time revenue streams are separated into discrete pots of money. After everything has been categorised, the fund's account may start to be updated with the many transactions that pertain to it. It allows for easier monitoring of a particular fund's income and expenditures.
To guarantee that designated funds are utilised only for their intended purposes, this accounting is often used by nonprofit organisations, charity trusts, Non-Governmental Organisations (NGOs), educational institutions, sports clubs, etc.
FAQs on Fund-Based Accounting: Explained
1. What is Life Members fee in subscription?
Subscription fees are often demanded monthly from non-commercial organisations' "ordinary" members. A further kind of member is known as a "Life Member," and the annual dues from these individuals are collected all at once.
Life subscriptions are considered capital contributions. A yearly subscription's worth of funds may be set up in this account. Following the member's passing, any remaining funds in such an account must be contributed to the Capital Fund.
2. What is a donation in accounting?
Donations are essential to the continued existence of nonprofit organisations and enable them to carry out their respective purposes. An organisation may better understand the value of the assistance it receives and where that support comes from by keeping accurate records of its contributions. Dedicating a gift amount from an individual's or corporation's taxable income is another perk that might accrue from charitable donations.
In accounting, a "donate" refers to anything given gratuitously, expecting to receive anything in return from the recipient organisation.
3. What is Receipts and Payments Account?
Receipts and Payment Account is a Real Account. This document serves as a synopsis of Cash Book. It is done after the fiscal year has closed. The debit side of the ledger is used to keep track of money coming in, while the credit side is where the money going out is recorded.
The Cash Book details monetary transactions in chronological sequence, while the Receipts and Payments document provides a tally of all monetary transactions. Cash and bank balances are recorded at the beginning and the conclusion of the day. Not included are payments and receipts that have yet to be processed.
