Profit-oriented businesses and non-profit organizations use two different accounting methods to track, record, and report their financial performances depending on their purposes and goals: the traditional business accounting system and the Fund Accounting method.
Traditional business accounting – used by business entities, such as a partnership, a corporation or a limited liability company (LLC) – focuses on the ability of the entity to generate profit, providing information on how much money was earned, how much was spent and how much was left over in a given time. Traditional business accounting also measures the finances of an entity as a whole. Businesses using this method prepare balance sheets that list the company’s owner’s equity (comprised of assets and liabilities), as well as income statements that list the company’s revenues, gains, expenses and losses every quarter.
On the other hand, fund accounting – used mainly by non-business entities, such as government agencies, non-profit organizations, churches, hospitals, and colleges and universities – breaks down an organization into a series of independent and self-balancing funds, making sure that the money earned, received and spent are all properly allotted for their specific purposes. Non-profits, having no owners, do not use balance sheets and income statements. Instead, they compile “statements of financial position” that focus only on assets and liabilities, as well as statements of activities each quarter.
Benefits of Fund Accounting
Generally Accepted Accounting Principles (GAAP), a set of accounting guidelines, rules, principles and standards used in the US, require non-business entities and government institutions to use fund accounting. Fund accounting offers many advantages and listed below are some its benefits for non-profit entities:
- Clear allocation and management of funds – Fund accounting allows organizations to appropriately allocate and manage the revenue they receive from different resources, such as tax payments, donations, grants, loans, and other public and private sources, into specific projects or goals. For example, the finances of a municipal government must be segregated into different funds like public works, recreation, and other services.
- Better tracking of restrictions – Because the revenue received by organizations and government institutions must be separated into their specific purposes in accordance with laws, regulations and restrictions, fund accounting helps these entities better monitor the restrictions attached with the revenue. In the same example above, tax payments from the citizens that the municipal government receives may only be used to fund certain public services.
- Transparency in evaluating performance goals – Fund accounting identifies the sources of the revenue and records the organization’s debts and assets. This makes it easier for people like fund administrators, managers, donors or taxpayers to evaluate the performance of an organization by emphasizing its strengths, weaknesses, and efficiency in turning revenue into expenses in relation to its goals and objectives.
Shifting to Real Time Fund Accounting
Like all the other sectors, the accounting industry has evolved over the decades to keep up with the changes that come with the advancements in information technology. Modern accounting firms and tech-savvy accounting professionals now heavily rely on advanced technologies and cloud-based solutions that provide quick and efficient results, allowing them to monitor and manage finances without the long wait times and turnarounds.
Speed and reliability are essentials in the world of accounting not just for profit-oriented entities but also for non-profit institutions. Taxpayers, funders, and donors are expecting more transparency and efficiency in financial reporting, demand for the capability to transfer information in real-time instead of relying on conventional financial reporting methods.
With real-time reporting in financial systems or real-time accounting, non-profits are able to see their financial data live, which allows them to make decisions and adjustments faster than before and enable a more streamlined monthly close process. It also provides crucial financial information that is always up-to-date, increasing accuracy and reducing the room for errors.
To help non-profit entities keep up with these demands and changes while still maintaining its focus on more important non-profit activities, Maxfinancials Accounting offers fund accounting outsourcing services that are tailored to the specific needs of the organization.
Armed with a cost-efficient and secure technology infrastructure, Maxfinancials Accounting’s team of highly qualified experts and Certified Public Accountants (CPAs) will serve as your fund accounting department without the burden of additional training and operational costs of an in-house team.