What Fund Accounting Means for a Nonprofit
Fund accounting for nonprofits is the bookkeeping method that tags every gift, grant and expense to a specific fund. The fund is the unit of accountability. The net asset class is the unit of reporting.
One clarification first, because three different fields claim the term. This page covers nonprofit fund accounting for US 501(c)(3) organizations, not investment-fund accounting for mutual funds or private equity, and not governmental fund accounting under GASB, where cities, counties and school districts report in separate self-balancing fund types under a different standard setter. So “what is fund accounting” has three honest answers, and this is the 501(c)(3) one. For the wider beginner’s tour, start with our overview of nonprofit accounting.
What GAAP actually requires
Most pages on this topic state the rule backwards. GAAP does not require a nonprofit to run fund accounting. GAAP requires the two net asset classes.
FASB’s Accounting Standards Update 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, replaced the previous three classes with two on the statement of financial position, net assets with donor restrictions and net assets without donor restrictions. It is effective for annual financial statements for fiscal years beginning after December 15, 2017. The older names, unrestricted, temporarily restricted and permanently restricted, are useful now only for explaining what moved.
Fund accounting is the internal tracking method organizations use to honor donor intent and to produce that two-class reporting, and the standard assumes you will. Writing in The CPA Journal in April 2018, Paul Copley and Loretta Manktelow put the job on management to ensure the accounting system is “properly designed to identify and track restrictions” and to track expenses by functional and natural categories.
Required destination. Optional road.
Three things create a fund, and only one comes from a donor
- A donor restriction. It lives in the gift instrument, the document that establishes how the money may be used. Foundation award letters and donor letters are the usual carriers, and the restriction is either a time restriction or a purpose restriction, as Propel Nonprofits explains in its guidance on managing restricted funds.
- A board designation. Your board sets money aside for a reserve or a special purpose. That isn’t a donor restriction, and ASU 2016-14 requires the amount and the purpose to be disclosed.
- A management or reporting need. A program with its own budget, a capital project, a fiscally sponsored initiative. Your finance team builds the fund because someone will ask for the number.
You’re not just tracking money. You’re tracking promises, and each promise has a different author.
Which is why a board treasurer reads past total net assets to the portion without donor restrictions, net of board designations. That is the money the organization can actually direct. How balances come out of restriction sits in our post on net assets in nonprofit accounting.
How Fund Accounting Works in Your Chart of Accounts and General Ledger
Fund accounting isn’t a second set of books. It’s one more dimension on every transaction in the books you already keep, so one journal entry reports by natural account, by function and by fund at once. If you’re working out how to set up fund accounting in a chart that was never designed for it, the dimensions are where to start.
Three dimensions, kept separate
- Natural account. What the money was spent on. Salaries, benefits, rent, occupancy, supplies, professional fees, depreciation. Nonprofit Accounting Basics, published by the Greater Washington Society of CPAs Educational Foundation, notes that net asset accounts typically begin with a 3 in a nonprofit chart, and that four-digit account numbers are usually adequate for small and midsize organizations.
- Function. Program services, management and general, or fundraising. These are the Form 990 Part IX columns.
- Fund. The restriction or designation the transaction belongs to. General operating, a named grant, a board-designated reserve, a capital campaign.
Small ledgers call the fund dimension a class, a location, a project or a tag. The label doesn’t matter, the discipline does. Every transaction gets a fund, including the dull ones, because the month a payroll entry lands with no fund is the month the grant report stops tying.
Don’t encode the fund inside the account number. Opening “Salaries, Youth Grant” and “Salaries, General” as separate accounts merges two dimensions into one, and then the chart needs a new account for every new grant. Keep the account list about what, and let the fund segment carry whose. Our guide to bookkeeping basics covers the coding fundamentals underneath it.
Set up net asset accounts by liquidity and class, never one per grant. Separate operating funds, board-designated reserves and net assets invested in property and equipment, then group restricted balances by time, purpose or perpetual. The fund segment carries the per-grant detail, which keeps the net asset section of your nonprofit balance sheet short and the schedule behind it useful.
Per-grant tracking, from award to remaining balance
For every restricted grant, your ledger should produce four numbers on demand. The award amount per the gift instrument. The approved budget by line, in the funder’s own categories, which rarely match your chart. Spend to date on those same lines, pulled from the fund segment rather than re-keyed. The remaining balance, read together with the remaining time.
Spend to date without time elapsed is a trap. A grant that is 40 percent spent looks healthy until you notice the period is 75 percent gone.
For federal awards this is written into the rule. 2 CFR 200.302, the Uniform Guidance requirement for financial management, says your system must identify in the accounts all federal awards received and expended, keep records that adequately identify the source and application of funds for federally funded activities, maintain effective control over all funds and property, and compare expenditures with budget amounts for each federal award. That is a specification for a fund-segmented general ledger.
The functional dimension has its own rule. The IRS instructions for Form 990 require 501(c)(3) and 501(c)(4) organizations to complete Part IX columns (A) through (D), Total, Program Services, Management and General, and Fundraising, and they allow any reasonable method of allocation where a system doesn’t allocate on its own. That is permissive about the method, not about whether you have one. Our guide to Form 990 covers what the rest of the return asks for.
A Worked Example: Tracking Three Funds Through One Month
Riverbend Learning is a fictional literacy organization, invented here to show the mechanics, and every figure below is a percentage rather than a dollar amount.
| Fund | Net asset class | What it holds | Opening balance, percent of total net assets |
|---|---|---|---|
| 100 General operating | Without donor restrictions | Gifts with no donor restriction, program fees, general support | 45 percent |
| 210 Youth Literacy Grant | With donor restrictions | A purpose-restricted foundation grant on a 12-month period | 25 percent |
| 300 Operating reserve | Without donor restrictions | A board-designated reserve | 30 percent |
Fund 300 is the row that gets miscoded most often. A board-designated reserve sits inside net assets without donor restrictions, because the board, not a donor, set it aside, and the same board can un-set it by vote. It is held back by governance, not by GAAP. ASU 2016-14 requires the amount and the purpose to be disclosed, which is how a reader of the statements learns the reserve exists.
| Fund | Share of the month’s revenue | Share of the month’s expense |
|---|---|---|
| 100 General operating | 68 percent | 61 percent |
| 210 Youth Literacy Grant | 32 percent | 39 percent |
| 300 Operating reserve | 0 percent | 0 percent |
Revenue less expense, by fund, is the month’s change in net assets. The reserve shows zeros on purpose, because a reserve is a designation of net assets funded by board action rather than by revenue.
| Function | Share of the month’s expense |
|---|---|
| Program services | 78 percent |
| Management and general | 14 percent |
| Fundraising | 8 percent |
That is a reporting cut, not a target. No regulator and no accounting standard sets a required overhead percentage. What matters is whether the basis is reasonable, documented and applied the same way every month. Riverbend allocates program salaries by time records, supplies directly, and occupancy by square footage. A ratio is context, not a grade.
| Youth Literacy Grant, cumulative | Percent |
|---|---|
| Award amount | 100 percent |
| Spend to date | 42 percent |
| Remaining balance | 58 percent |
| Grant period elapsed | 50 percent |
Spend is running 8 points behind the calendar, which is a month-six conversation rather than a month-eleven emergency. Then come four month-end tie-outs.
- Fund balances to net asset classes. Funds 100 and 300 together equal net assets without donor restrictions, Fund 210 equals net assets with donor restrictions, and the three together equal total net assets.
- Pooled cash to the bank. Riverbend keeps one operating account. Cash reconciles to the statement and the fund schedule explains who has a claim on it, because a fund balance is a ledger attribute, not a bank balance. If the mechanics are new ground, start with what account reconciliation involves.
- Functional expense to the natural total. Program plus management and general plus fundraising equals total expense by natural account, with no plug.
- Grant schedule to the ledger. Cumulative spend on the schedule equals cumulative expense coded to Fund 210, to the penny.
Four checks, every month. The entries that move satisfied restrictions out of the restricted class, conditional grants and the liquidity and availability disclosure all sit with the net asset classes linked earlier, and Riverbend’s fund schedule feeds them.
Common Fund Accounting Mistakes and How to Fix Them
Almost every fund accounting failure traces to one of two causes, confusion about who imposed a restriction, or a fund tag treated as optional. Neither is carelessness. Finance teams are short on capacity, and a structure built for three grants gets asked to carry eleven.
- A separate bank account for every restricted fund. It feels like stewardship and it backfires into more reconciliations, more transfers and more chances to pay a restricted cost from the wrong account. A. Michael Gellman, writing for Nonprofit Accounting Basics, calls separate accounts for restricted funds “almost never required nor advisable,” and names documentation rather than bank segregation as the key to verifying proper use. Pool the cash, track the funds in the ledger, and honor a donor’s explicit separate-custody requirement where one exists. Reconciling that account monthly is what makes the fund schedule trustworthy.
- Treating a board-designated reserve as restricted. The fix is the reversal test. Robert Dyson and Travis Carey noted in The CPA Journal that an endowment fund created by the governing board is generally reported in net assets without donor restrictions, because the board can reverse its decision to create the fund.
- Treating a budget line as a donor restriction. Only the gift instrument creates a donor restriction. With no award letter or donor letter imposing a purpose or a time limit, the money is without donor restrictions no matter what the budget calls it.
- One fund per donor instead of one fund per restriction. Twelve donors to the same after-school program don’t need twelve funds. They need one purpose-restricted fund, with donor-level detail kept in the development system.
- Allocating functional expenses once a year, at audit time. A retroactive allocation across twelve months is a guess dressed as a method, and it is the first thing an auditor probes. Allocate monthly on a documented basis, time records for salaries and benefits, square footage for occupancy and depreciation.
- Recognizing a multi-year unconditional grant as the cash arrives. Propel Nonprofits’ guidance is that income is recorded in the year an unconditional commitment for the funds is received, regardless of when the related expenses occur. Conditional grants follow a different rule.
- A fund map that lives in one person’s head. This is the expensive one, because the restriction logic, the allocation bases and the grant deadlines leave when the person does. Write it down. A fund list with the restriction, the source document, the period and the owner, plus a close checklist and grant schedules more than one person can find.
Indinero documents your close checklist, grant schedules and policies in the Exchange, so your finance process doesn’t live with one person.
What the Board and Auditors Look for in Your Fund Reports
A board and an auditor read the same fund reports for different reasons. The board wants to know what the organization can spend. The auditor wants to know whether every restriction classification traces back to a document.
The treasurer’s three questions
Total net assets is the wrong headline number, because it includes money the organization can’t touch. Propel Nonprofits makes the point directly, that restricted funds counted in total net assets aren’t actually available except according to the restriction, and that the column without donor restrictions is the most valuable tool for monitoring current-year activity.
- How much of our net assets is without donor restrictions, and how much of that has the board designated? A good answer names both figures and the report they come from, the statement of financial position supported by the fund schedule.
- Which restricted grants are behind on spend relative to their period? A good answer is a grant schedule showing award, spend to date, remaining balance and percent of period elapsed, for every active grant.
- What is our program, administration and fundraising split this month, and on what basis was it allocated? A good answer names the basis, not only the percentages.
Boards should see all three monthly, in the same format every month, so the trend reads without anyone re-explaining the report. Our post on nonprofit financial management covers the oversight calendar those reports sit inside.
What the independent auditor will request
Fund-level records are the evidence behind every restriction classification, so the requests follow the fund structure. Expect gift instruments, a restricted net assets roll-forward by fund tied to the general ledger, the documented spend that satisfied each release, the functional allocation basis and the written method that appears in the notes, bank reconciliations for every account, and board minutes, which are the authority behind every board designation. Preparing for a nonprofit audit walks through that request list in order.
With indinero, every schedule your auditor will request is tracked all year, with an owner and the evidence for each.
Thresholds deserve a note, because they move. The IRS instructions for Form 990 say an organization whose gross receipts are normally $50,000 or less may submit Form 990-N instead of filing Form 990 or 990-EZ, and an organization with gross receipts less than $200,000 and total assets under $500,000 at the end of the tax year may choose Form 990-EZ. Those figures belong to the tax year of the instructions cited here, so check the current year’s instructions before relying on them. An organization that expends federal awards above the federal threshold falls under the single audit requirements in 2 CFR Part 200, Subpart F, a broader engagement than a financial statement audit. State audit and charitable registration thresholds vary by state, so both the trigger and the level come from your state charity regulator or state auditor.
How Indinero Supports Nonprofit Fund Accounting
Fund accounting works when someone does it the same way every month and writes down how. That is the part indinero takes on.
Indinero gives your nonprofit an experienced finance team and the Exchange, its client platform. Four named roles sit on the account. Your controller leads the monthly review, the close and your audit preparation. A senior accountant records gifts, grants and bills, and reconciles every account. A nonprofit CFO advisor handles budgets, reserves, board preparation and grant reviews. A tax specialist supports Form 990 preparation and answers your team’s tax questions.
You choose the scope. A full finance function, where indinero runs bookkeeping and the close, controller oversight, audit preparation, CFO advice, budgets and board reporting. Or support for your team, where indinero works alongside a part-time bookkeeper, reviews the monthly close, and carries extra load through audit season and grant deadlines.
The monthly cadence is what holds a fund structure together.
- Books closed every month, with every account reconciled.
- Restricted grants tracked and reconciled monthly.
- Functional expenses allocated every month, with the program, administration and fundraising split shown in the Exchange from your own books, in categories aligned to Form 990 Part IX.
Still on QuickBooks Desktop or spreadsheets? We start from where your books are today, document the work, and move it to a repeatable monthly process in the Exchange. A fund or class segment in your chart of accounts carries the tracking, whichever ledger you keep.
Two boundaries, stated plainly. Indinero prepares your organization for its audit and your independent auditor performs it. Your tax specialist supports Form 990 preparation and doesn’t file or sign the return.
The people on your indinero team look at your books through a nonprofit eye, with a nonprofit CFO advisor reviewing your budgets, reserves and grant applications. Dream Machine Innovation Lab launched in 2023 to bring changemakers together on poverty, prisons, pollution and polarization. With a team of ten or fewer, they needed monthly financials and program-level reporting without building an accounting department. Behind a team like theirs sit 150+ delivery professionals, 18 days average to onboard, 5+ years average client partnership, and systems that are SOC 2 compliant. Pricing is a written proposal after a review of your books.
Fund accounting shouldn’t be the thing standing between your finance team and the mission. If restricted grants, the monthly close and the audit file all depend on one person’s memory today, read through indinero’s nonprofit accounting services, then talk to an expert about what your first monthly review would cover. We’d like to hear how your funds are tracked right now.
Frequently asked questions
Six questions come up most often when a finance team or a board sets out to rebuild a fund structure. Each one turns on the same distinction, who imposed the limit and what your ledger has to prove.
Is fund accounting required under GAAP for nonprofits?
No, GAAP doesn’t require nonprofits to use fund accounting, it requires the two net asset classes under FASB ASU 2016-14. Those two classes are net assets with donor restrictions and net assets without donor restrictions, and fund accounting is the internal tracking method organizations use to honor donor intent and produce that reporting. Management still has to design the accounting system to identify and track restrictions, and a fund structure is the common way to do that.
How is fund accounting different from for-profit accounting?
A nonprofit tracks money by its purpose and restriction rather than by owner equity, which is the core difference from for-profit accounting. There are no owners and no equity accounts, so the balancing section is net assets in two classes instead of retained earnings, and results are reported as the change in net assets. Revenue also carries donor restrictions that dictate timing and use, and expenses are reported by function as well as nature, which no business statement requires.
Should every restricted grant get its own fund?
Every restricted grant with its own budget, reporting requirement or period needs its own fund, because you have to prove its spend separately. The practical test is whether anyone will ask you to report on that grant on its own, so small gifts with no donor restriction don’t each need a fund. Federal awards always qualify, since 2 CFR 200.302 requires identification of each federal award in the accounts and a comparison of expenditures with budget amounts for each award.
Can a small nonprofit run fund accounting without specialized software?
Yes, a small nonprofit can run fund accounting if the general ledger supports a fund or class segment and the process is documented. Most small organizations tag that segment on every transaction and keep a schedule per grant that reconciles to the ledger monthly. Spreadsheets alone get fragile once grants multiply, because the ledger and the schedule drift apart. Indinero starts from where your books are today and documents the monthly process.
How do funds relate to net assets with and without donor restrictions?
Funds roll up to the two net asset classes, and each fund maps to exactly one class based on who imposed the limit. Restricted grant funds roll into net assets with donor restrictions, while general operating funds and board-designated reserves roll into net assets without donor restrictions, because the board, not a donor, set the reserve aside and can reverse it by vote. Board designations are disclosed by amount and purpose under ASU 2016-14.
How often should fund balances be reconciled?
Fund balances should be reconciled every month, as part of the close, alongside the bank reconciliation rather than after it. Each fund balance ties to the general ledger and to the grant schedule, and cash reconciles to the bank statement, so a restricted balance can’t be quietly overspent. Waiting until year end means reconstructing twelve months of coding decisions from memory, and indinero’s nonprofit team reconciles restricted grants monthly so the schedules an auditor asks for already exist.
