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Fund Accounting with PCS Fund

Fund accounting comprises the set of accounting practices and standards used to organize and track the finances of not-for-profit organizations. These practices and standards differ in significant ways from those used by for-profit organizations. The driving force behind these differences is the need to be able to strictly segregate and track monies received and expended to accomplish specific purposes. To achieve this strict segregation, accounting methods are established that utilize funds to track financial activities.

Strictly speaking, a fund is simply a part of an organization which can be dealt with and examined as an entity separate from the rest of the organization. Monies received and expended by a fund may or may not have restrictions placed on them by donors or by the organization’s Board of Directors. For example, the Board may establish a Building Fund that would acquire amounts by donations, grants or transfers from other funds within the organization. Its purpose would be to allow the construction of or improvements to building. A fund may also be associated with a particular source of revenue. Thus, a large grant, especially if it has a particular purpose, would warrant the establishment of a separate fund dedicated to tracking the receipt and use of amounts associated with that specific grant.

For an exhaustive treatment of fund accounting, we recommend Financial and Accounting Guide for Not-for-Profit Organizations, Fifth Edition by Gross, M. J., Larkin, R. F., Bruttomesso, R. S. and McNally, J. J., John Wiley and Sons, Inc., 1994.

In PCS Fund, all accounting is done within the context of various funds. When PCS Fund is set up, a General Fund (also called the Current Unrestricted Fund) is created. The creation of other funds is left to the user and is optional. The number of funds that can be created is not limited.

All accounting transactions recorded using PCS Fund includes a fund number. This allows the user to fully record and examine all accounting activities of the the entire organization and of any particular fund or class of funds.

The “value” of a fund isdetermined by its net assets. This corresponds to the equity of a for-profit organization. The net assets of a fund are also commonly referred to as its “fund balance.” The current net assets of a fund is the difference between its income and expenditures for the current fiscal year. The sum of the current net assets and the year-end net assets at the end of all preceding years in the life of the fund make up its net assets. Another way of looking at net assets is that the net assets are the difference between the assets and liabilities of a fund. The current net assets are then the difference between the assets and liabilities at present minus that difference at the end of the last fiscal year.

Fund Classes

The Financial Accounting Standard Board (FASB) prescribes three classes of funds. Financial reports should be available the describe the financial position of the organization in which all funds are grouped together and consolidated under these classes. PCS Fund complies with these requirements.

Unrestricted Funds

Unless a donor or grantor (an outside entity) has placed legally binding restrictions on the use of contributions to a fund, the fund is an unrestricted fund. The General Fund is the prime (an mandatory) example of such a fund. Other funds the user may create that will fall into this class would include funds created by the organization (not an outside entity), funds established to handle amounts loaned from other funds within the organization or a fund created to monitor the receipt and use of funds from an endowment. Income from sales, gains on investments, member dues or rental fees would be credited to the General Fund (or a least to an unrestricted fund).

Temporarily Restricted Funds

Most funds that receive donations that are targeted for particular uses, which donations are legally binding, fall into the Temporaily Restricted class of funds. The main feature of this class of funds is that eventually, the assets of these funds will be transferred to and spent by an unrestricted fund. For example, a grant may be received to provide support to a clinic operated by the organization. Although care must be taken to insure that these monies are spent only in support of the clinic, the expenditures, will, according to best accounting practices, be made by the General Fund. (The fact that the user may not actually do this in PCS Fund does not change the fact that this is what should be done.) Subsequently, amounts are transferred out of the temporarily restricted grant fund into the General Fund to cover the expenditures.

Generally accepted accounting practice (Statement of Financial Accounting Standards No. 117) for not-for-profits prescribes that only the unrestricted class can incur expenses. PCS Fund does not enforce this, but does make it easy to make inter-fund transfers to maintain compliance with this rule.

(Permanently) Restricted Funds

Premanently restricted (here, just Restricted Funds) are funds established to manage monies received that cannot the expended by the organization. A primary example of such a fund is one that is used to record an endowment given with the stipulation that the principal must be left intact – only the interest generated by investing the gift can be used. The idea behind this class is that, while the donated monies are owned by the organization, they can never be used except to generate additional income (that can be spent through the General Fund) through investment gains or interest.

Pledges, Contributions, Donations and Dues

A feature of not-for-profit accounting that diverges from for-profit accounting is the treatment of pledges. Generally approved practice dictates that pledges be treated as an asset of the organization. (In for-profit accounting, sales orders would be a close equivalent to a pledge. Sales orders typically do not appear on a company’s books.) If an organization obtains a written pledge — a pledge that is considered binding on the pledger — the organization is obligated to enter the pledged amount into the organization’s books. However, pledged payments are often spread out over a period of years and the organization is allowed to discount out-year amounts. PCS Fund permits pledges to be categorized as binding or non-binding and, for binding pledges, performs the required discount calculations for the user. It is one of the few fund accounting packages to do so.

For-profit companies realize income mostly through sales. Not-for-profit organizations receive income from a variety of sources including contributions, grants, member dues, receipts of donated goods and sales from bookstores and gift shops. PCS Fund has forms dedicated to these type of revenue transactions allowing for straightforward entry and tracking of such revenue streams.

Inter-Fund Accounts

An essential feature of fund accounting is that, for each fund, the books must balance. This requirement makes fund accounting a bit more complicated than for-profit accounting, where balance is needed only for the entire organization. (It also means that common practices in for-profit accounting like the tracking of cost centers will not suffice when dealing with funds in not-for-profit organizations.) In practice, transactions often occur in which one fund buys, sells, gives away or receives something on behalf of another fund. In fact, following the SFAF No. 117 rule that all expenses are incurred by the General Fund, such transfers between funds is mandatory if any other fund is to do anything with its money.

In order to keep track of inter-fund loans, and to make sure the balance sheet for each fund remains in balance, Due-From/Due-To accounts are required. In PCS Fund, each fund has an asset Due-From/Due-To (receivable/payable from other funds). A fund’s Due-From/Due-To account is created whenever a fund is created.

(Note: In PCS Fund, Due-From/Due-To accounts are not directly accessible by user. Their balances are maintained automatically by the program.)

To see the roll Due From/Due To accounts play in fund accounting, consider the following examples:

Example — A Purchase

A purchase is made on behalf of a fund (in this case, Fund #1) for something (in this case, telephone service) for which other funds are partially responsible. In PCS Fund’s AP Transaction window, the form’s header allows the fund responsible for the purchase to be set. In this case, the responsible fund is Fund #1. Each detail line in the AP form allows a Detail Fund to be specified. The Detail Fund is the fund on whose behalf the Header Fund is making the purchase. Thus the phone bill could be paid for by the Header Fund (Fund #1), but Fund #1 and another fund, say Fund #2, could be specified in the details as Detail Funds that actually used the phones and are responsible for portions of the phone expense. In the journal, the transaction is as follows:

Account Activity Fund Specified in Journal Debit Credit
Accounts Payable Header Fund (Fund #1)   395
Phone Expns Acct (Fund #1) Detail Fund #1 325  
Phone Expns Acct (Fund #2) Detail Fund #2 70  

At this point, the transaction as a whole is balanced, but the funds are out of balance. To correct this problem, we need a Due-From/Due-To transaction to track the fact that the Fund #1 has incurred the payable of $70 on behalf of Fund #2. (In effect, Fund #1 has made a loan of $70 to Fund #2.) Thus the following postings must also be included in the transaction:

Account Activity Fund Specified in Journal Debit Credit
Fund #1 Due From/To Acct owed by Fund #2 to Fund #1 70  
Fund #2 Due From/To Acct owed to Fund #1 from Fund #2   70

(PCS Fund automatically generates these inter-fund loans whenever transactions involving different funds are entered. The resulting journal entries are seen in both reports and in the transaction entry forms so that the user can see exactly what is occurring. The automatic creation of these Due-From/Due-To journal entries insures that fund balances are always maintained.)

Continuing with this example, when the bill is paid, it should be paid from the Fund #1’s bank account. No Due-From/Due-To’s entries need to be generated in the cash payment transaction. The payment transaction postings are:

Account Activity   Debit Credit
Fund #1 Bank Acct     395
Accounts Payable (Fund #1)   395  

Example — An Inter-Fund Loan

In the previous example, Fund #1 paid Fund #2’s phone bill and thus, Fund #2 has incurred a debit to Fund #1. In effect, in that example, Fund #1 loaned $70 to Fund #2. At some point, Fund #2 should repay Fund #1 this amount. An inter-fund loan transaction is made to reverse the results of the purchase just described.

Account Activity Due-From/Due-To Debit Credit

Fund #2 Due From/To Acct

owed by Fund #1 to Fund #2

Fund #1 Due From/To Acct

owed to Fund #2 from Fund #1

Fund #1 Bank Acct   70  
Fund #2 Bank Acct     70

The net result of the purchase, payment and inter-fund loan is:

Account Activity   Debit Credit
Fund #1 Bank Acct     325
Fund #2 Bank Acct     70
Phone Expns Acct (Fund #1)   325  
Phone Expns Acct (Fund #2)   70  

PCS Fund facilitates all of the activities described here by allowing funds to be chosen in both the header and the details of each relevant window. Inter-fund loans (and, when needed, inter-fund transfers) can be created using a special form accomodating cash transfers between banks either by automatic withdrawals/deposits or by bank drafts (checks) and deposit combinations.

Example — General Ledger Transaction

The user enters the following transaction:

Fund #1 receives $1000 in Account #52001. Fund #2 supplies $600 from Account #52002 and Fund #3 supplies $500 also from Account #52002 ($100 more than Fund #1 ultimately receives — the extra $100 ends up going to Fund #4 in Account #53004). Fund #4 can then be viewed as getting $100 from Fund #1.

Account Activity Fund Debit Credit

Account #52001

Fund #1

Account #52002

Fund #2

Account #52002 Fund #3   500
Account #52004 Fund #4 100  

PCS Fund automatically generates the following additional Due-From/Due-To journal entries to bring the transaction into balance for each fund.

Account Activity Receivable-from/Payable-to
Fund in Due-From/Due-To
Debit Credit

Fund #1 Due To (payable to Fund #2)

Fund #2

Fund #1 Due To (payable to Fund #3)

Fund #3

Fund #1 Due To (payable to Fund #4) Fund #4   -100
Fund #2 Due From (receivable from Fund #1) Fund #1 600  
Fund #3 Due From (receivable from Fund #1) Fund #1 500  
Fund #4 Due From (receivable from Fund #1) Fund #1 -100  

As in the previous examples, eventually a set of inter-fund loans would be made to reverse (repay) the inter-fund loans generated by transactions such as this.