Accounting for nonprofits is very different by nature from accounting for regular profit-seeking businesses.
In particular you’ll need to account for different types of funds.
Here’s everything you need to know.
What is fund accounting?
Put simply, fund accounting tracks accountability rather than profits, and makes sure that all money is being used for the intended purpose the money was given to the nonprofit in the place.
This is essential for nonprofits that receive cash from different sources. Separate accounts and balance sheets are used for different purposes, so that donors can be certain their money is being used how they would have wished.
This restricts the use that funds can be put to, but also gives you more control and focus by making it easier to monitor what campaigns are doing well or otherwise.
Establishing a separate budget for separate funds helps a non-profit effectively use the money they have coming in, as well as satisfy the donors who give to each different fund.
But what are these different types of funds?
Restricted funds
Restricted funds are funds given to a nonprofit for one specific purpose that is legally binding. As such, the trustees of the nonprofit are not able to alter this themselves.
Sometimes, however, the terms of the endowment contain a mechanism for the restriction to be reviewed.
The Charities Act 2011 does allow for some restrictions to be changed under some circumstances, usually by consulting with the Charity Commission.
This should never be done without their express permission and the Commission are clear that this should only ever be done as a last resort, however.
It isn’t necessary to put a restricted fund in a different account but it should be separated in your accounting. You are not allowed to use these funds for a purpose they weren’t intended for.
Unrestricted funds
These funds are any that are given to your non-profit as general donations, meant for no specific purpose.
They can be spent as the nonprofit sees fit, although obviously in accord with the organisation’s function.
How we can help
If you own a non-profit, chances are you didn’t set out with the ambition of crunching numbers and doing paperwork. However, every nonprofit needs to be on top of their fund accounting, which is why it’s a good idea to call in professional accountants.
Because most of your team will be focused on your nonprofit’s mission, it’s easy to overlook the need for rigorous accounting in a way profit organisations rarely do.
As specialist non-profit accountants, we can review your accounts, balance your books, prepare you for audits and compare your expenses and income, leaving you free to focus on the job in hand.
Get in touch with the team today. We’d be glad to discuss how we can help you.
