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What Are the Advantages of Fund Accounting?

By Elle Jay
Updated May 16, 2024
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The term fund accounting refers to a system of financial record keeping that focuses on how an organization uses its finances. Fund accounting highlights where money comes from and how it is spent, with a spotlight on accountability rather than profitability. Nonprofit groups and government agencies frequently use this type of financial reporting system, also known as nonprofit accounting or government accounting.

Many accounting systems show profitability, or how much money a company makes. Fund accounting emphasizes the how instead of the how much. This type of reporting shines a light on the receipt and spending of money during a given time period. Funds used by a nonprofit or government agency often come with restrictions and rules about how money can be spent. The use of fund accounting provides a detailed picture of an organization’s incoming and outgoing finances.

Clarity is one of the main advantages of fund accounting, because this system illustrates important details about an organization’s spending. The government and special service agencies often give money to nonprofits in the form of grants or other donations. These funds typically have a specific purpose and regulations for how money can be used. It is illegal for an organization to misuse government or donated money designated for a particular function. Nonprofit accounting offers a way to identify specific funds and track how they are used.

Nonprofit accounting creates different accounts that define the purpose for a certain sum of money. This system separates records for specific funds that can be tracked to see how and where the money is spent. This makes it easier for the original source of the funds to gather information. Reports using government accounting can also reveal any misuse of grant money or other donated funds. This is especially important for some social service agencies.

As with other reporting systems, fund accounting can reveal the financial health of a business. Details about incoming and outgoing funds provide insight into the management and performance of a company. An organization gains access to fiscal information when accounts are kept separately, via nonprofit accounting. Financial reports are a communication tool telling the outside world how things are going and how money is used.

Fund accounting can also help with budgeting. This type of financial reporting separates and summarizes different financial accounts, offering valuable insight into the patterns of how an organization uses money. This helps determine future financial needs and provides details about how those funds should be disbursed within the agency. Reports generated with fund accounting also help an organization see where they should seek money for future endeavors.

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