Fund accounting is how charities and nonprofits keep track of money that comes with strings attached. Charitable organizations often receive funding from several different sources throughout the year, and not all of it can be used the same way. Some donations can support general operations, while others must be used for specific programs, equipment, or projects.
Let’s say your nonprofit receives a $50,000 grant for a specific program. A few weeks later, a fundraising campaign brings in another $20,000 in general donations. That’s $70,000 coming into the organization, but how much of it can you actually use to cover everyday expenses?
The answer depends on the restrictions attached to each dollar.
Fund accounting helps you keep those amounts organized so you know where your money came from, what it can be used for, and how much remains available.
Here’s how fund accounting in Canada works, and what your organization should be tracking.
What is Fund Accounting?
Fund accounting is a way for charities and nonprofits to track financial resources according to their intended purpose or restrictions.
Rather than treating all revenue and expenses as one pool of money, fund accounting separates financial activity into different funds. Each fund tracks resources associated with a particular purpose, such as general operations, a community program, or a capital project.
For example, a nonprofit might receive a government grant to deliver a youth employment program. Even if that money sits in the same bank account as other donations, the organization needs to track how much belongs to the program and how it’s being spent.
Fund accounting for nonprofits makes that possible without necessarily requiring a separate bank account for every grant or donation.
Under Canada’s Accounting Standards for Not-for-Profit Organizations (ASNPO), formal fund accounting is an available financial reporting approach rather than a requirement. Organizations that don’t use it must still account for externally restricted contributions, most commonly by deferring them until the related expenses are incurred. The idea here is to make it easier to understand which resources are available for different purposes and whether funding restrictions are being respected.
Restricted, Unrestricted, and Internally Designated Funds
Different types of nonprofit funding come with different rules about how the money can be used, namely, via restricted and unrestricted funds. Knowing which funds have restrictions, and which offer more flexibility, helps you better understand your organization’s finances.
Restricted Funds
Restricted funds are resources that must be used according to restrictions imposed by an external party, such as a donor or grant provider.
For example, a donor might contribute $10,000 specifically to purchase equipment for a community kitchen. Your organization can’t simply redirect that money toward office rent because another expense becomes more urgent.
Restrictions may relate to how the funds are spent, when they can be used, or whether they must be maintained as an endowment. The organization needs to maintain records showing that these conditions have been followed.
Unrestricted Funds
Unrestricted funds don’t come with externally imposed restrictions on their use. General donations, membership revenue, and certain fundraising proceeds may fall into this category, depending on the circumstances.
These funds give organizations more flexibility to cover expenses such as:
- Rent and utilities
- Administrative salaries
- Insurance
- Technology and office supplies
- Other operating costs
Internally Designated Funds
Internally designated funds are amounts that an organization’s board or management has set aside for a particular purpose. For example, a board might decide to reserve $30,000 for future building repairs or unexpected operating expenses.
Unlike externally restricted contributions, these designations are generally established by the organization itself and may be changed through the appropriate internal approval process. Money designated by the board isn’t necessarily subject to the same restrictions as a donation earmarked for a specific purpose by an outside funder.
Following the Money: A Fund Accounting Example
Let’s look at how this works for a hypothetical Canadian nonprofit.
A community organization begins the year with three sources of funding:
- $40,000 in general donations: Available to support regular operating expenses.
- $60,000 in grant funding: Restricted to a specific after-school program.
- $25,000 in board-designated reserves: Set aside from existing unrestricted resources for future equipment replacement.
The organization has $100,000 in new contributions and a further $25,000 in existing reserves. However, that doesn’t mean all $125,000 is available for whatever the organization needs.
During the year, the nonprofit spends $35,000 delivering its after-school program. Assuming those expenses qualify under the grant agreement, $25,000 of the restricted funding remains unspent.
Meanwhile, the organization uses $30,000 from general donations to cover operating costs, leaving $10,000 from those donations. The board-designated reserve remains at $25,000.
Fund accounting allows management to see these amounts separately rather than relying on the organization’s combined cash balance. When someone asks whether the nonprofit can afford to hire another employee or expand an existing program, everything is laid out clearly.
How Fund Accounting Appears in Financial Reports
Your organization might have plenty of money coming in, but how much is available for each program or expense? Fund accounting helps answer that question by showing where funds are going and what’s still available.
Depending on how your financial statements are prepared, you may see individual funds broken out into separate columns, supporting schedules, or notes that explain how the money is being used.
Understanding Fund Balances
A fund balance helps show the resources remaining within a particular fund after accounting for its financial activity and obligations.
For example, if a program fund begins the year with a $15,000 balance, recognizes $20,000 in revenue, and incurs $25,000 in expenses, with no other changes or transfers, its closing fund balance is $10,000.
That information helps management understand how much of the program’s funding has been used and what may still be available for future expenses.
However, a fund balance isn’t always the same as cash available in the bank. As with the difference between cash flow and profit, financial reports can show resources that aren’t immediately available to spend. Depending on the accounting method and the transactions involved, that might mean money tied up in receivables, equipment, or other assets, or offset by liabilities.
Reviewing Activity by Fund
Fund-level reports can help answer practical questions such as:
- How much grant funding have we received and spent?
- Which programs are operating within their budgets?
- Are any restricted contributions still unused?
- How much unrestricted funding remains available?
- Are our reserves increasing or decreasing?
Having this information readily available makes it easier to manage day-to-day finances and answer questions from your board, funders, and other stakeholders.
Accurate record-keeping is also a requirement for registered charities. The Canada Revenue Agency requires charities to maintain books and records that allow it to verify how money is received, spent, and used to support charitable activities.
Fund Accounting and Contribution Revenue Recognition
Fund accounting helps you track where your organization’s money goes, but there’s another consideration: when that funding should be recorded as revenue.
Under ASNPO, organizations choose between two approaches to recognize contributions: the deferral method or the restricted fund method. Whichever method is chosen, it must be applied consistently to all contributions received. Each affects how funding appears in your financial statements.
The Deferral Method
Under the deferral method, restricted contributions intended to cover future-period expenses are generally recorded as deferred contributions and recognized as revenue when the related expenses are incurred.
For example, if your nonprofit receives a grant in December to deliver a program the following year, the contribution may initially be deferred rather than recognized entirely as revenue in December.
Endowment contributions are treated differently. Because they must be maintained permanently, they’re recorded as direct increases in net assets rather than as revenue.
The Restricted Fund Method
Under the restricted fund method, a restricted contribution that meets the recognition criteria is recognized as revenue of the corresponding restricted fund in the current period, rather than deferred to match future expenses. Because this method is a specialized use of fund accounting, it’s only available to organizations that present restricted funds in their financial statements.
When a restricted contribution doesn’t have a corresponding restricted fund, it’s recognized in the general fund under the deferral method instead.
These methods affect how contributions appear in financial statements, even though the organization must still track applicable funding restrictions.
Questions to Ask About Your Current Fund Accounting Setup
You don’t need to personally manage every accounting entry to understand whether your organization has a useful fund accounting system.
Start by asking a few questions:
- Can we identify externally restricted funding?
You should be able to distinguish funding with donor or grant restrictions from money available for general operations. - Can we track spending against each relevant grant or fund?
Your records should show which expenses have been charged to specific programs and funding sources. - Can we explain our remaining balances?
Management should understand what’s left, what restrictions apply, and whether the amounts reconcile with the underlying records. - Do our reports help the board make decisions?
Financial information should make it easier to understand available resources, program spending, and upcoming commitments.
If these questions are difficult to answer, your existing chart of accounts, transaction tracking, or nonprofit financial reporting processes may need attention.
Get a Clearer Picture of Your Nonprofit’s Finances
When you’re managing several funding sources, it’s easy to lose track of how much money is available and what it’s meant to cover. Good fund accounting takes the guesswork out of those decisions, helping you stay on top of spending, meet funding requirements, and plan for what’s ahead.
At Launchbury Accounting & Bookkeeping Solutions, we help charities and nonprofits across Canada keep their financial records organized and their reporting accurate. Whether you need help tracking restricted funds or more general nonprofit accounting support, we’re here to help you get a clearer picture of your finances.
Book a free consultation to discuss your organization’s accounting needs and how we can help.