Fund accounting helps nonprofits become more accountable to funding sources by tracking donor revenue designated for specific purposes.
Editor’s Note: The following questions and answers represent real world challenges nonprofits encounter managing nonprofit accounting everyday tasks. Our advisor column is intended to provide basic advice on questions related to the topic. Answers to these questions are simply the view and opinion of our nonprofit accounting pros. Nonprofit Accounting Pro shall not be liable, answerable or accountable for any loss or damage resulting from the advice given by our advisor.
How to Track Donor Designated Revenue
Answer: If you are following true fund accounting principles, then donations received as a Memorial donation, but have no restrictions placed on the, should be classified as General Fund donations, but can be classified as a separate line item called Memorial donations.If the donor does place a restriction on the Memorial Fund donation, then it would be classified in the Donor Designated Fund as a Memorial Donation. Once you have incurred the expenses for the designation, then you can transfer the funds from the Designated Fund to the General Operating Fund.
Answer: Your issue has more to do with providing proper stewardship of donor funds, not necessarily fund accounting. If a donor designates that their donation ‘funds’ for a specific purpose, it is the obligation of your organization to comply with the donor’s wishes. This can be accomplished with the proper accounting tools used in your organization. With proper categorization of donor designations, it is easy to report on the designation and use of those funds. You don’t necessarily need fund accounting, just better fiscal management of funds coming in and funds going out.
Answer: When you say you have never seen accounting done like this, have you not seen the financial statements of the organizations you have worked for? All nonprofits in the US must generate external financial statements that present their financial position broken down by the two net asset (fund) classes: Net Assets Without Donor Restrictions and Net Assets With Donor Restrictions. Since your experience is on the development side, it would be beneficial if the data from the fund raising application that feeds into accounting contains the intent of the donor as to the use of their funds. This will help in providing proper stewardship back to the donor as to the use of those funds. A proper integrated system where the fund raising system is seamlessly integrated to accounting helps facilitate this process. Check out FastFund Online from Araize. It does everything that Raiser’s Edge and Financial Edge do at a fraction of the cost.
Answer: To tell you the truth, it sounds like a real mess. First, Why do you have a dozen bank accounts for each fund? All that does is create a ton of extra work. Second, what defines a fund? Most religious organization’s I’ve worked with over complicate their accounting by setting up too many funds, when all they really need is the ability to track revenue and expenses for specific ministries, programs, projects, or whatever you want to call them. If all you need to know is how much has been designated and spent for specific ‘funds’ you might be able to simplify your process by creating revenue / expense ‘buckets’ for those activities. What software are you using for your accounting and member / donor management? Of course, I would need a lot more information to provide more concrete suggestions. I would suggest signing up for a demo of our FastFund Online system to show you a better way to manage your finances.
Answer: No, the church can approve a transfer of funds from the general fund to take care of the deficiency in the negative fund. This is normal in an organization like a church, where activities are split into funds. You really are not spending money from ‘retained earnings’ It is quite normal for net assets from previous years to be used to cover shortfalls in subsequent years. A Statement of Activities and Changes to Net Assets report will show the carry forward of net assets from one year to another.”
Answer: Regardless of the type of nonprofit you are, managing funds in accounting is the same. From an accounting perspective, you need to track the purpose of the funds and intention of the donor, whether it is Unrestricted or Restricted. The donor’s intent also dictates the proper categorization of earnings on the investments in the funds. Fund Management as it relates to investments in capital markets and maintaining satisfactory credit and bond ratings has no impact on the accounting of the actions and results of the investments.
In the normal course of navigating the myriad of issues related to nonprofit fund accounting, you may have encountered some of these questions. It is essential to follow compliant nonprofit accounting methods to ensure accountability to your funding sources.
We hope our answers provide clarification. We welcome your questions and feedback. Feel free to comment below.
About the Author
Joseph Scarano is the CEO of Araize, Inc., developers of cloud-based FastFund Online Nonprofit accounting, fundraising and payroll software solutions to help your nonprofit become more transparent, accountable and sustainable.