Fund Accounting

Not to be confused with Accounting Fund.

Fund accounting is an accounting methodology used primarily in governmental and non-profit entities.

Unlike business accounting, which emphasizes the profitability of an entity, fund accounting emphasizes the accountability of funds received.

General Concepts[edit]

In fund accounting, activities are grouped into various funds. There is always one unrestricted fund (which captures activity of monies not designated for a specific purpose) and (except for very small non-profits) at least one restricted fund (capturing activity of funds designated for a specific purpose).

A restricted fund may be established by another entity (such as a donor giving money to a church for its building fund) or by the entity itself to set aside funds for a specific purpose (such as a church setting aside funds for a youth mission trip). Governments may also do this (such as to transfer money from the general fund to a special fund, for example to contribute its share of total expenses to widen a state road through town).

Governmental entities and larger non-profits record transactions using modified accrual accounting; smaller groups (mainly churches) will use cash accounting.

A major difference in fund accounting between non-profits and governmental entities is the treatment of budgetary amounts: governmental entities will formally record budgetary estimated revenues and approved appropriations, along with actual revenues, expenditures, and encumbrances in the accounting records, while non-profit entities will only record actual transactions.

Unlike with a company, where all activity is combined into one set of financial statements, in fund accounting the unrestricted fund (or general fund) and each restricted fund is shown separately. (In practice, the front of the financial statements may have an executive summary showing the unrestricted fund, followed by all other funds consolidated, with detail by fund shown later.)

State and Local Government[edit]

In state and local governments, funds are categorized into three general groups: governmental, proprietary, and fiduciary.

Governmental Funds[edit]

These funds generally include:

• General Fund: This is usually the largest fund, and includes all governmental revenues and expenditures not designated for a specific purpose. For taxpayers, revenues include property and sales taxes, while expenditures include law enforcement, public safety, parks, and general government services. There will be only one general fund.
• Special Revenue Fund: These funds have dedicated revenues which can only be used for a specific purpose, and a government can (and usually does) have several such funds. A common one is a state highway fund, funded by gasoline and other fuel taxes, which can only be used for transportation improvements.
• Capital Projects Fund: These funds are for the acquisition and/or construction of fixed assets (such as a new fire station). As with special revenue funds, commonly a government will have several such funds at any one time. Once a specific project ends, the associated fund ceases to exist.
• Debt Service Fund: These funds (also called interest and sinking funds) account for funds used to pay long-term debts. Bonds issued by a government, to be paid with tax levies over a period of years, nearly always require an associated debt service fund (and each separate bond package will have its own fund). As with capital project funds, once the bonds and associated interest are repaid, the fund ceases to exist.
• Permanent Fund: These funds account for resources (such as endowments) where only the earnings can be spent, and usually only for a specific purpose. An example would be a permanent fund given by a wealthy benefactor to maintain the city founder's house as a museum.

Proprietary Funds[edit]

These funds generally include:

• Internal Service Fund: These funds are used for operations which serve other funds or departments, and are reimbursed at cost. An example would be an in-house print shop; if the code enforcement department needed new warning forms for citizens not mowing their lawns, it would order them from the print shop, and a portion of their funding would be transferred to the print shop.
• Enterprise Fund: These funds operate much like a private business, in that their operations are (nearly completely) funded solely by user fees. A common one is a city water department, which bills customers a set rate per account and a rate per gallon of water used.

Fiduciary Funds[edit]

These funds are used to account for assets held in trust for the benefit of other individuals or entities (this differs from a Permanent Fund, which is held for the benefit of the entity itself, though restricted). An example would be a self-administered pension plan.