Fund accounting is an important tool for governments, non-profit organizations, and other entities that receive and manage funds from various sources. It helps to ensure that funds are used for their intended purposes and that there is transparency and accountability in the management of financial resources.
One of the key principles of fund accounting is the segregation of funds. This means that funds are tracked and managed separately, based on their source and purpose. This helps to prevent overspending in any one area and to ensure that restricted funds are not used for unintended purposes.
Another key principle of fund accounting is the distinction between restricted and unrestricted funds. Restricted funds are those that have been donated or allocated for a specific purpose. Unrestricted funds can be used for any purpose that is deemed necessary by the organization.
The segregation of funds and the distinction between restricted and unrestricted funds are two important principles that help to ensure the accountability and transparency of fund accounting. By following these principles, organizations can help to ensure that their funds are used wisely and for the benefit of the community.
This article will explore these two principles in more detail and discuss how they can be applied to fund accounting. We will also discuss the benefits of using fund accounting and how it can help organizations to achieve their financial goals.
Fund accounting is an accounting system that is used by government agencies, non-profit organizations, and other entities that receive and manage funds from various sources. The purpose of fund accounting is to track financial resources based on their requirements and restrictions.
As the goals of the above mentioned entities are not profit based, their funds must be reinvested back into the organization and community for different operational costs and programs. Due to this, fund accounting focuses on accountability and transparency. There are seven principles that fund accounting uses to uphold these standards:
- Segregation of funds
- Restricted vs. unrestricted funds
- Accrual accounting
- Budgeting
- Financial reporting
- Audit requirements
- Compliance
The first two principles focus mainly on where funds are being placed. The segregation of funds guarantees that funds are used for their intended purposes, while tracking restricted vs. unrestricted funds ensures that restricted funds are not used for unintended purposes. Let’s dive deeper into these two key principles.
There are many organizations within a community that the government must provide support for. Segregating funds plays an important role in the budgeting to be able to do so.
Governments utilize the segregation of funds to essentially view each fund as its own entity with their own set of books. For local governments, this typically means separate funds for the police department, school districts, and medical facilities, for example.
Segregating these funds helps prevent overspending in any one area. To further ensure that funds are allocated properly, fund accounting distinguishes between restricted funds and unrestricted funds.
Restricted funds are either non-spendable or required to be used for a set purpose. One purpose could be finances set for highway funds, for example. These restrictions are typically put in place by legislation or external resources.
Unrestricted funds can be used for purposes an organization views have the greatest needs. Often times, this fund will go towards organizational costs, like salaries or utilities.
Fund accounting systems allow governments to maintain a tight control over their finances, with a distinct focus on their remaining resources. Unrestricted fund balances are a good way to judge this, as they are generally viewed as a high-level indicator of a government’s financial standing.
Federal, state, and local governments use fund accounting versus general accounting systems because it helps officials easily divide finances by funds, departments, and projects. While general accounting works for profit-based businesses, it is not designed to accurately report many different revenue sources and obligations. Fund accounting segregates funds because it helps the bookkeeping and audit process easier to manage. The distinction between restricted and unrestricted funds is necessary, as there are laws in place that ensure that governments are using their money to benefit the community they are serving. These two key principles are extremely important in governments having financial transparency and accountability.
About Harris Local Government
For 40+ years, Harris Local Government has empowered public sector leaders with specialized software for fund accounting, HR, regulation, and billing. Serving 5,500+ municipalities, counties, and more across the US, we reduce financial risk and drive efficiencies. A division of Harris Computer Corp and Constellation Software, we serve 125,000+ customers globally.
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