Fund accounting is a unique system used by governments and nonprofits to track resources. It focuses on accountability and stewardship rather than profit, using separate funds to segregate resources based on purpose or restrictions.

This system employs different accounting bases and fund types. Governmental funds use modified accrual accounting, while proprietary and fiduciary funds use accrual. Each type serves specific purposes, from general operations to enterprise activities to trust management.

Fund Accounting Principles

Unique Characteristics and Focus

• Fund accounting focuses on accountability and stewardship of resources rather than profitability, which is the focus of for-profit accounting
• The use of funds allows for the segregation of resources based on their intended purpose, legal requirements, or restrictions imposed by donors or grantors (grants, donations)

Basis of Accounting

• The modified accrual basis of accounting is used for governmental funds, which recognizes revenues when they are measurable and available, and expenditures when liabilities are incurred
• The accrual basis of accounting is used for proprietary and fiduciary funds, which recognizes revenues when they are earned and expenses when they are incurred, regardless of when cash is received or paid (similar to for-profit accounting)
• Financial statements in fund accounting are prepared separately for each fund, providing transparency and accountability for the use of resources within each fund (balance sheet, income statement, cash flow statement)

Types of Funds

Governmental Funds

• Governmental funds include the General Fund, Special Revenue Funds, Capital Projects Funds, Debt Service Funds, and Permanent Funds
  • The General Fund is used to account for all financial resources except those required to be accounted for in another fund (main operating fund)
  • Special Revenue Funds are used to account for specific revenue sources that are legally restricted or committed to expenditure for specified purposes (gas taxes for road maintenance)
  • Capital Projects Funds are used to account for financial resources used for the acquisition or construction of major capital facilities (new government buildings, infrastructure)
  • Debt Service Funds are used to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest (bonds, notes)
  • Permanent Funds are used to account for resources that are legally restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting government's programs (endowments)

Proprietary Funds

• Proprietary funds include Enterprise Funds and Internal Service Funds
  • Enterprise Funds are used to account for operations that are financed and operated in a manner similar to private business enterprises, where the intent is to recover costs primarily through user charges (public utilities, airports)
  • Internal Service Funds are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental unit, or to other governmental units, on a cost-reimbursement basis (fleet maintenance, IT services)

Fiduciary Funds

• Fiduciary funds include Pension Trust Funds, Investment Trust Funds, Private-Purpose Trust Funds, and Custodial Funds
  • Pension Trust Funds are used to account for resources that are required to be held in trust for the members and beneficiaries of defined benefit pension plans, defined contribution plans, or other postemployment benefit plans (government employee retirement plans)
  • Investment Trust Funds are used to account for the external portion of investment pools reported by the sponsoring government (local government investment pools)
  • Private-Purpose Trust Funds are used to account for trust arrangements under which principal and income benefit individuals, private organizations, or other governments (scholarship funds, cemetery perpetual care funds)
  • Custodial Funds are used to account for resources held by the reporting government in a purely custodial capacity (property taxes collected on behalf of other governments)

Budgetary Accounts

Purpose and Use

• Budgetary accounts are used to record the adopted budget, track actual revenues and expenditures, and monitor compliance with the budget throughout the fiscal year
• The use of budgetary accounts allows for the comparison of actual financial activity to the adopted budget, enabling management to identify variances and make necessary adjustments
• Budgetary accounts are typically used in governmental funds, as these funds are required to have a legally adopted budget

Components of Budgetary Accounts

• The budgetary accounts include estimated revenues, appropriations, encumbrances, and fund balances
  • Estimated revenues represent the anticipated inflows of resources for the fiscal year (property taxes, grants, fees)
  • Appropriations represent the authorized expenditures for the fiscal year (salaries, supplies, capital outlay)
  • Encumbrances represent commitments related to unperformed contracts for goods or services (purchase orders)
  • Fund balances represent the difference between assets and liabilities, including budgetary accounts (unassigned, assigned, committed, restricted, nonspendable)
• Budgetary control is maintained by ensuring that expenditures do not exceed appropriations at the legal level of control, which is usually at the fund, department, or object level

Governmental vs Proprietary vs Fiduciary Funds

Governmental Funds

• Governmental funds are used to account for activities primarily supported by taxes, grants, and similar revenue sources, focusing on current financial resources and the use of the modified accrual basis of accounting
• Governmental funds have a short-term focus and measure the flow of current financial resources
• Governmental funds do not report capital assets or long-term liabilities on their balance sheets

Proprietary Funds

• Proprietary funds are used to account for activities that are financed and operated in a manner similar to private businesses, focusing on the determination of operating income, financial position, and cash flows, and using the accrual basis of accounting
• Proprietary funds have a long-term focus and measure the flow of economic resources
• The financial statements for proprietary funds include the statement of net position, statement of revenues, expenses, and changes in net position, and statement of cash flows

Fiduciary Funds

• Fiduciary funds are used to account for resources held in a trustee or custodial capacity for the benefit of parties outside the government, focusing on net position and changes in net position, and using the accrual basis of accounting
• Fiduciary funds have a long-term focus and measure the flow of economic resources
• The financial statements for fiduciary funds include the statement of fiduciary net position and the statement of changes in fiduciary net position