Fund Definition, Fund Balance, and Assets
In their “Financial and Accounting Guide for Not-For-Profit Organizations” (fifth edition, p. 25), CPAs Gross, Larkin, Bruttomesso, and McNalley describe these three terms as follows:
Any portion of an organization for which distinct account records are maintained is referred to as a fund.
Valuable items that the business owns or oversees are called assets. Cash, investments, real estate, and sums due to the company are examples of asset types.
The fund balance, a meaningless mathematical figure, represents the organization’s net worth. It is calculated by deducting all liabilities from all assets.
Fund balances simply exist on paper, as contrast to assets, which have no inherent value and cannot be spent. A fund’s assets, fund balances, liabilities, revenues, and expenses are all included in its accounting records.
What are non-profit organizations?
A few years back, a dental customer of mine who frequently treated low-income patients under the California medical assistance program known as “MediCal” asked me an odd question. He wanted to know if he could be considered a “non-profit organization” because of the amount of MediCal labor he did.
I initially thought he was kidding, but he was serious. I told him that just because he charged less for his services did not absolve him of paying taxes. In fact, he made a respectable profit. However, this is a great example of how a significant segment of the public misunderstands non-profit organizations (NPOs).
Although they are known as civil society organizations or non-governmental organizations (NGOs) outside of the US, NPOs are present in most countries. Some organizations are exempt from paying taxes because they assist the public in some way. They are meant to make the social fabric stronger.
They differ from corporate organizations in that they have no owners. A Board of Directors oversees the organization’s activities. An Executive Director reports to the Board, just like a company’s CEO. A lengthy application process is usually required to ascertain the organization’s goal or purpose before exempt status is granted.
According to Independent Sector, a company that gives non-profit boards information, there are 1.5 million non-profits with combined annual general sales of more than $670 billion.
Their analysis shows that six percent of all organizations in the US are non-profits, and one in twelve Americans work for a non-profit. Profit-making businesses are concerned because that’s huge business and some of these NPOs are unfairly competing. Think about the distinctions between a private hospital and a non-profit. Nonprofit hospitals are free to utilize all of their earnings on things like higher pay and equipment, but private hospitals are required to pay taxes on their income. NPOs are therefore closely watched by the Internal Revenue Service, state attorney general offices, private watchdog organizations, and the media.
There are many different types of non-profit organizations. Public charities are exempt under Internal Revenue Service code 501(c)(3). It is obvious that these organizations—hospitals, museums, orchestras, private schools, churches, scientific research groups, soup kitchens, etc.—do much more than simply provide free medical care and services to the poor. To qualify for exempt status, these organizations must show broad public support rather than relying on a single source of funding.
There are several private foundations, establishments, academic institutions, trade and professional associations, social welfare organizations, and more. Non-profit governmental entities include communities and agencies, but they handle accounting and record keeping substantially differently from 501(c)(3) businesses.
What format do non-profit books follow?
A nonprofit organization’s books are organized similarly to those of a profit-making business, with a few notable deviations.
Because the board may use the additional funds for a variety of objectives, a non-profit may generate a profit. However, NPOs usually refer to profit as “Excess Revenues over Expenses” to avoid being portrayed as profit-making organizations. “Excess Expenses over Revenues” denotes a net loss. Recall the fundamental equation that underpins double-entry accounting:
Assets = Liabilities Equity
Instead of using EQUITY, a non-profit will utilize FUND BALANCE or, more lately, NET ASSETS. The concept is still the same. The organization’s assets are calculated by subtracting its commitments.
NPOs report their financial statements differently than profit-making businesses in the area of fund accounting. Naturally, the presentation varies according on the size and goals of the company. For instance, a Little League baseball team may only have one fund that requires accounting. Furthermore, their use of the money they receive cannot be restricted in any way. It’s all quite easy.
On the other hand, a scientific research institution might be working on several projects at once with funding from commercial and government grants or contracts, private donations, and sales of research documents, some of which are limited to specific expenses and the rest of which are uncontrolled. An accounting challenge is accurately reporting revenue and expenses for each fund or project and compiling all of the funds into a single, cohesive financial statement.
In the past, donors found it difficult to tell from the financial records which funds were restricted and which weren’t, as well as if their contributions were being used properly.
The Financial Accounting Standards Board (FASB) decided that all external accounting should employ the “Net Assets” technique instead of the “Fund Balance” approach. Three groups of assets—Restricted Assets, Temporarily Restricted Assets, and Unrestricted Assets—must essentially be allocated to the organization’s equity under the net assets concept. You can still utilize Fund Accounting for internal bookkeeping, but you must disclose your restricted and unrestricted funds for external reporting. If you don’t have any limited cash, it’s not that hard.
One of the most crucial elements of establishing non-profit books is a thoroughly thought-out Chart of Accounts. In other words, this entails figuring out which general ledger accounts work best for recording income, expenses, etc. and organizing them logically. Some American organizations simply follow the structure of the IRS non-profit 990 form. They do this to make sure the format of their financial statements corresponds with the return. This makes it easier to transfer information from their financial statement to the 990 form.
Setting up your accounts to clearly display the source of your income and the expenses related to it is crucial, though. I can vouch for the fact that trying to fix the accounts afterward is not fun. I’ve dealt with NPOs that initially performed this poorly. It can be well worth the investment to hire a professional accountant to assist you with the setup. To ensure you’re on track and avoid heartbreak at the end of the year, it’s even preferable to have an accountant review your records a few times a year.