Fund Accounting Questions: Real World Answers

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

Question: We have a Memorial Fund which has no restrictions on how it is used. Should the expenses made out of the Memorial Fund be expensed out of the General Operating Fund and transfers made fund to fund and asset to asset?

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.

Question: Donor imposed restrictions are only upheld for true endowments. Most donations at my nonprofit are in the general ledger categorized by what country the money was used in. Not by the donors wishes, like for diversity aid – or summer internships. We are raising close to $1million annually and growing. How can I get my finance department help me without fund accounting?

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.

Question: I worked for years at Blackbaud supporting The Raiser’s Edge, beta testing and QA, then technical project management for Blackbaud in their professional services division. I have never at all seen accounting done like this. We use Raiser’s Edge (RE) in Advancement. I know how to configure RE to make the most of its inherent accounting functionality – not much but enough to get an accurate and legal post file for a general ledger. But the way accounting is done there is not a clear way to ensure alignment with what a donor wants and how the money is being spent. The only way I know how to do this is via Fund Accounting. RE is set up to require it. Each fund has a credit/debit side for each gift type (pledge, pledge payment, bequests, stock/property, gift-in-kind, cash, etc.) But it sits empty for now. Before I got here the advancement coordinator was sending emails to members of the finance department with information about some of the donations, but not all. Not unless it was a really high amount essentially. They use Great Plains. If you have any resources that you could point me to that would help me better align and map to them while still being good stewards that would be greatly appreciated!

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.

Question: Hi, I work for a reform synagogue and am getting ready to make transfers using all of our Due To accounts which seem very antiquated and a lot of work. We have about a dozen bank accounts for each Fund with a corresponding Due To account which has never seemed to work quite right. We do not have a separate revenue, expense and balance sheet for each of these accounts nor do they have their own chart of accounts. It makes end of fiscal year transfers very confusing! Any suggestions?

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.

Question: We are a multi site church with a fund established for each campus (all share the same checking). We have one fund that has been operating in the negative year over year because they had a rough couple of years financially. Does that fund have to remain negative until the end of time (the amount negative will never be made up to bring to a zero balance). Also, in “for profits” there is the idea of spending from retained earnings. We want to write a check from the “earnings” for the previous year…. how to we do that and not effect each individual campus budgets?

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.”

Question: How do we best manage fund accounting for Private nonprofits? They are increasingly dependent on the financial markets for capital funds, must obtain and maintain satisfactory credit and bond ratings in order to get these funds. But that is not easy.

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.

Bottom Line

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

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.