Fund accounting is a different type of accounting to the one traditionally used in businesses.
Whereas businesses and self-employed individuals typically prepare, or get an accountant to prepare, accounts in order to create a cash balance and understand how profitable, or loss making, a business has been, fund accounting does not focus on these aspects.
Instead, fund accounting is based on accountability in terms of where money has been distributed and spent. Non-profit organizations and government, both departmentally and as a whole, are typical examples of groups that would use fund accounting methods.
Fund accounts are set up to show where money has come from and how it has been spent, therefore giving a full view of cash flow in and out of an organization or department. Fund accounts should always ideally be “self-balancing,” in that the money raised should always equal expenditure, however there may be times when a cash surplus is showing. On these occasions, the fund accounts may also show plans for future expenditure, in order to reduce the cash surplus to zero, as well as future fundraising initiatives and spending plans related to these.
Organisations may have an overall accounting process, but it is often the case that they will need to have a separate fund account for certain incomings and outgoings.
For example, say a hospital was to receive a government grant in order to improve facilities, and at the same time received a charity donation on the provision that they invest it in a particular area. The hospital would need to provide transparency and make it easy for anyone to see how that money has been spent. It is usually not as simple as matching up the money in with the final result.
The hospital would need to demonstrate where the money has been used at each stage of each process. Therefore, they would have a breakdown of research, consultancy, and various other aspects that would be involved in the process. As well as making the hospital transparent from a financial standpoint, it also makes them accountable for the efficiency of their spend, and also gives the government and the charity some clear feedback on whether the sums of money granted are right for the project in mind.
An organisation that has fund accounts would usually run these alongside their usual accounts. After all, they will usually have incomings and outgoings the same as a regular business, and which need to be shown on a regular balance sheet and in an accounting document rather than as part of a fund account.