| Accountancy | |
|---|---|
| Key concepts | |
| Accountant · Accounting period · Bookkeeping · Cash and accrual basis · Cash flow forecasting · Chart of accounts · Journal · Special journals · Constant item purchasing power accounting · Cost of goods sold · Credit terms · Debits and credits · Double-entry system · Mark-to-market accounting · FIFO and LIFO · GAAP / IFRS · General ledger · Goodwill · Historical cost · Matching principle · Revenue recognition · Trial balance | |
| Fields of accounting | |
| Cost · Financial · Forensic · Fund · Management · Tax (U.S.) | |
| Financial statements | |
| Balance sheet · Cash flow statement · Statement of retained earnings · Income statement · Notes · Management discussion and analysis · XBRL | |
| Auditing | |
| Auditor's report · Financial audit · GAAS / ISA · Internal audit · Sarbanes–Oxley Act | |
| Accounting qualifications | |
| CA · CPA · CCA · CGA · CMA · CAT · CFA · CIIA · IIA · CTP · ACCA |
Fund accounting is an accounting system emphasizing accountability rather than profitability, used by non-profit organizations and governments. In this system, a fund is a self-balancing set of accounts, segregated for specific purposes in accordance with laws and regulations or special restrictions and limitations.[1]
The label, fund accounting, has also been applied to investment accounting, portfolio accounting or securities accounting – all synonyms describing the process of accounting for a portfolio of investments such as securities, commodities and/or real estate held in an investment fund such as a mutual fund or hedge fund.[2][3] Investment accounting, however, is a different system, unrelated to government and nonprofit fund accounting.
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Nonprofit organizations and government agencies have special requirements to show, in financial statements and reports, how money is spent, rather than how much profit was earned. Unlike profit oriented businesses, which use a single set of self-balancing accounts (or general ledger), nonprofits can have more than one general ledger (or fund), depending on their financial reporting requirements.[4] An accountant for such an entity must be able to produce reports detailing the expenditures and revenues for each of the organization's individual funds, and reports that summarize the organization's financial activities across all of its funds.[5][6]
A school system, for example, receives a grant from the state to support a new special education initiative, another grant from the federal government for a school lunch program, and an annuity to award teachers working on research projects. At periodic intervals, the school system issues a report to the state about the special education program, a report to a federal agency about the school lunch program, and a report to another authority about the research program. Each of these programs has its own unique reporting requirements, so the school system needs a method to separately identify the related revenues and expenditures. This is done by establishing separate funds, each with its own chart of accounts.
State and local governments use three broad categories of funds: governmental funds, proprietary funds and fiduciary funds.[1][6]
Governmental funds include the following.[7][8]
Proprietary funds include the following.[7]
Fiduciary funds are used to account for assets held in trust by the government for the benefit of individuals or other entities.[15] The employee pension fund, created by the State of Maryland to provide retirment benefits for its employees, is an example of a fiduciary fund.[13] Financial statements may further distinguish fiduciary funds as either trust or agency funds; a trust fund generally exists for a longer period of time than an agency fund.[16]
State and local governments have two other groups of self-balancing accounts which are not considered funds: general fixed assets and general long-term debts. These assets and liabilities belong to the government entity as a whole, rather than any specific fund.[17] Although general fixed assets would be part of government-wide financial statements (reporting the entity as a whole), they are not reported in governmental fund statements.[18] Fixed assets and long-term liabilities assigned to a specific enterprise fund are referred to as fund fixed assets and fund long-term liabilities.[19]
The accrual basis of accounting used by most businesses requires revenue to be recognized when it is earned and expenses to be recognized when the related benefit is received. Revenues may actually be received during a later period, while expenses may be paid during an earlier or later period. (Cash basis accounting, used by some small businesses, recognizes revenue when received and expenses when paid.)
Governmental funds, which are not concerned about profitability, usually rely on a modified accrual basis. This involves recognizing revenue when it becomes both available and measurable, rather than when it is earned. Expenditures, a term preferred over expenses for modified accrual accounting, are recognized when the related liability is incurred.[20][21]
Proprietary funds, used for business-like activities, usually operate on an accrual basis.[22] Governmental accountants sometimes refer to the accrual basis as "full accrual" to distinguish it from modified accrual basis accounting.[23]
The accounting basis applied to fiduciary funds depends upon the needs of a specific fund. If the trust involves a business-like operation, accrual basis accounting would be appropriate to show the fund's profitability. Accrual basis is also appropriate for trust funds using interest and dividends from invested principle amounts to pay for supported programs, because the profitability of those investments would be important.[24]
State and local governments report the results of their annual operations in a comprehensive annual financial report (CAFR), the equivalent of a business's financial statements. A CAFR includes a single set of government-wide statements, for the government entity as a whole, and individual fund statements. The Governmental Accounting Standards Board establishes standards for CAFR preparation.[6]
Governments do not use the terms profit and loss to describe the net results of their operations. The difference between revenues and expenditures during a year is either a surplus or a deficit. Since making a profit is not the purpose of a government, a significant surplus generally means a choice between tax cuts or spending increases. A significant deficit will result in spending cuts or borrowing. Ideally, surpluses and deficits should be small.[25][26][6]
Federal government accounting uses two broad groups of funds: the federal funds group and the trust funds group.[27]
The United States government uses accrual basis accounting for all of its funds. Its consolidated annual financial report uses two indicators to measure financial health: unified budget deficit and net operating (cost)/revenue.[34]
The unified budget deficit, a cash-basis measurement, is the equivalent of a checkbook balance. This indicator does not consider long-term consequences, but has historically been the focus of budget reporting by the media. Except for the unified budget deficit, the federal government's financial statements rely on accrual basis accounting.[34]
Net operating (cost)/revenue, an accrual basis measurement, is calculated in the "Statements of Operations and Changes in Net Position" by comparing revenues with costs.[35] The federal government's net operating (cost)/revenue is comparable with the net income/(loss) reported on an income statement by a business, or the surplus/(deficit) reported by state and local governments.
Nonprofit organizations generally use the following five categories of funds.[36]
The Report of Consolidated Financial Statements, used for annual financial reporting by nonprofit organizations, is similar to the CAFR used by state and local governments. However, nonprofit organizations use accrual basis accounting for their funds.[37] A nonprofit's financial statements generally include the following.
Standards for nonprofit financial statements are set by the Financial Accounting Standards Board.
The following is a simplified example of the fiscal cycle for the general fund of the City of Tuscany, a fictitious city government.
The fiscal cycle begins with the approval of a budget[42] by the mayor and city council of the City of Tuscany. For Fiscal Year 2009, which began on July 1, 2008, the Mayor's Office estimated general fund revenues of $35 million from property taxes, state grants, parking fines and other sources. The estimate was recorded in the fund's general ledger with a debit to Estimated Revenues and a credit to Fund Balance.[43]
| Ledger Account | Debit | Credit | |
|---|---|---|---|
| 1 | Estimated revenues | $35,000,000 | |
| Fund balance | $35,000,000 |
An appropriation was approved by the city council, authorizing the city to spend $34 million from the general fund. The appropriation was recorded in fund's general ledger with a debit to Fund Balance and a credit to Appropriations.[43]
| Ledger Account | Debit | Credit | |
|---|---|---|---|
| 2 | Fund balance | $34,000,000 | |
| Appropriations | $34,000,000 |
In subsidiary ledgers, the appropriation would be divided into smaller amounts authorized for various departments and programs,[44] such as:
| Fire department | $5,000,000 |
| Police department | $5,000,000 |
| Schools | $10,000,000 |
| Public works | $6,000,000 |
| Transportation | $4,000,000 |
| Mayor's office | $4,000,000 |
The complexity of an appropriation depends upon the city council's preferences; real-world appropriations can list hundreds of line item amounts. An appropriation is the legal authority for spending[45] given by the city council to the various agencies of the city government. In the example above, the city can spend as much as $34 million, but smaller appropriation limits have also been established for individual programs and departments.
During Fiscal Year 2009, the city assessed property owners a total of $37 million for property taxes. However, the Mayor's Office expects $1 million of this assessment to be difficult or impossible to collect. Revenues of $36 million were recognized, because this portion of the assessment was available and measurable[20][21] within the current period.
| Ledger Account | Debit | Credit | |
|---|---|---|---|
| 3 | Taxes receivable | $37,000,000 | |
| Estimated uncollectible taxes | $1,000,000 | ||
| Revenues | $36,000,000 |
The city spent a total of $30 million on its employee payroll, including various taxes, benefits and employee withholding. A portion of the payroll taxes will be paid in the next fiscal period, but modified accrual accounting requires the expenditure to be recorded during the period the liability was incurred.[20][21]
| Ledger Account | Debit | Credit | |
|---|---|---|---|
| 4 | Expenditures | $30,000,000 | |
| Wages payable | $20,000,000 | ||
| Taxes payable | $5,000,000 | ||
| Benefits payable | $5,000,000 |
The Public Works Department spent $1 million on supplies and services for maintaining city streets.[46]
| Ledger Account | Debit | Credit | |
|---|---|---|---|
| 5 | Expenditures | $1,000,000 | |
| Vouchers payable | $1,000,000 |
At the end of the fiscal year, the actual revenues of $36 million were compared with the estimate of $35 million. The $1 million difference was recorded as a credit to the fund balance.[47]
| Ledger Account | Debit | Credit | |
|---|---|---|---|
| 6 | Revenues | $36,000,000 | |
| Estimated revenues | $35,000,000 | ||
| Fund balance | $1,000,000 |
The city spent $31 million of its $34 million appropriation. A credit of $3 million was applied to the fund balance for the unspent amount.[47]
| Ledger Account | Debit | Credit | |
|---|---|---|---|
| 7 | Appropriations | $34,000,000 | |
| Expenditures | $31,000,000 | ||
| Fund balance | $3,000,000 |
When the current fiscal period ended, its appropriation expired. The balance remaining in the general fund at that time is considered unexpended. City government agencies are not allowed to spend the unexpended balance, even if their expenditures during the now-ended fiscal period were less than their share of the expired appropriation. A new appropriation is necessary to authorize spending in the next fiscal period. (Liabilities incurred at the end of the fiscal period for goods and services ordered, but not yet received, are usually considered expended, allowing payment at a later date under the current appropriation. Some jurisdictions, however, require the amounts to be included in the following period's budget.)[48]
Instead of re-applying the unspent balance from the general fund to the same programs, the city council may choose to spend the money on other programs. Alternatively, they may use the balance to cut taxes or pay off a long-term debt. With a large surplus, reducing the tax burden will normally be the preferred choice.[6]