Fund Accounting

Many businesspeople are unfamiliar with fund accounting. This type of accounting, however, serves to facilitate expenditure control and stewardship reporting in the public sector. The concept of separate record keeping for separate funds is not exceedingly difficult, but care must be taken that fund accounting based financial reports are presented in a straightforward manner, since separate reporting on a large number of separate "funds" quickly becomes confusing. In their book, A Brief Introduction to Managerial and Social Uses of Accounting (1975), May, Mueller and Williams note that the oldest control technique utilized for not-for-profit organizations is probably the segregation of appropriations into separately established funds. For instance, a small city government may have a fire department fund, a water department fund, a traffic court fund, a street and engineering fund, a planning commission fund, a public school fund, and so on.

Similarly, a local YMCA organization may have a capital project fund, a special program fund, a scholarship fund, and an office and operations fund. Because specification of nonproprietary resources into large batteries of individual funds is still used almost universally, accounting for not-for-profit organizations is often identified by accountants as "fund accounting" (May, Mueller & Williams, 1975, p. 69).Within this concept, an individual fund becomes an accounting entity unto itself, and financial records and controls are established with a specific fund focus. In some cases, separate funds and separate accounts for them are required by law, especially in municipalities.

In fund accounting, it is standard practice to distinguish between a general fund and special purpose funds. The general fund normally provides the resources required to operate the unit or agency on a day-by-day basis. The wages of employees, building maintenance, and general office expenses are items that are then chargeable to a general fund. By contrast, special funds are established to yield accountability for separately identifiable activities which make individual control procedures necessary or desirable. “The pervasiveness of fund accounting is illustrated by the fact that the semiannual Uniform Certified Public Accountants Examination usually contains at least one lengthy problem on this subject. Undergraduate accounting curricula of colleges and universities often devote at least one quarter or semester course to fund accounting” (May, Mueller & Williams, 1975, p. 69).