Fund accounting is a system often used by nonprofit organizations and public sector institutions. The system is a method of recording and viewing of such entities in the accounting of assets and liabilities grouped according to their respective utilities.
Fund accounting generally requires a special reporting method that should indicate in the final balance, a clear flow of financial expenditure in an organization. The different final balance reporting methods which are used by the business sector emphasize the value of gains or losses obtained by the organization in a particular accounting period.
Fiduciary funds are employed to account for assets that are kept in trust by the state for the benefit of individuals or organizations. Financial statements can also identify fiduciary funds as being trust or agency funds. In essence, a trust fund prevails for a much longer period of time compared to an agency fund.
General business sector organizations have only one group of accounts recording method, which is the balanced or ledger (general ledger), while the nonprofit sector can use a different method depending on their needs.
A business manager for an entity should be able to create reports that can explain the flow of expenditure and income on the available funds. And these should be reported in summary form covering the entire organization in relation to the allocation and utilization of funds.
Due to the existence of a large number of books, account numbering is designed in such a way as to conform with such needs. Each group account number represents the allocation of specific funds. An alternative way entails making use of the capabilities of the recording and reporting system contained in the accounting software.
For this reason, many nonprofit and public sector organizations take advantage of special accounting software specifically designed to accommodate the needs of the organization in terms of reporting.
The use of fund accounting is often a topic of debate in the accounting field, as some professionals question the benefits of implementing such a system in view of the generally accepted accounting standards.
However, the characteristics and operations of nonprofit organizations render the fund accounting system to be useful, particularly in relation to financial reporting in conformity with the needs of the organization.
For this reason, the accounting profession recognizes the existence of these needs and continue to support the utilization of funds by establishing accounting standards to meet those needs.