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Aug 21 2018

Nonprofit Funds and Programs: How to Categorize in Accounting

A true nonprofit accounting system tracks revenue from funds and expenses from programs or functional areas. Funds and programs are the core of nonprofit accounting.

Main Difference Between Funds and Programs

Funds are used for classifying revenue only. Programs are used for categorizing your expenses by functional areas:

  • Programs
  • Support Services: Management and General, and Fundraising

So when setting up your nonprofit accounting system, remember programs are used to track your expenses, while funds are used to track the designation of your revenue.

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Nonprofit Fund Accounting Classifications

In previous topics on nonprofit fund accounting we explained why nonprofits need to use fund accounting software and its importance in presenting their financial statements. There is a lot of confusion as to what should be classified as a fund, and what should be classified as a program, or functional area when setting up your nonprofit accounting system.

With the FASB regulations for nonprofit financial statement presentation, there are only two types of funds, or net assets:

  • Unrestricted which contains revenue that has no restrictions placed on it by the donor, or the restrictions have been met.
  • With Donor Designations which contains all revenue that has restrictions placed on it by the donor, or grantor and those restrictions have not been met.

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FASB Guidelines

Therefore, funds really should only be used to classify revenue. If you take a look at audited financial statements for a nonprofit that were prepared in compliance with Generally Accepted Accounting Principles (GAAP) and the new FASB guidelines, you will only see revenue in the restricted net asset classification. But, what you will see is Revenue Released from Restrictions when expenses are incurred and revenue is matched to the expense.

On these financial statements all expenses are classified in the Unrestricted fund.


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Bottom Line

A mistake made by some nonprofit organizations is to create a fund for every program, grant, mission, project, or other activity that they operate. All of those activities should not be classified as funds in your accounting system using unique classes in the chart of accounts.

A better way to track activity is the use of program codes within the Unrestricted fund. With the proper set up, a program classification within a fund can properly track the designated revenue and associated expenses for all mission-based activity for your organization.

Want to read more? Check out these insightful articles:

  • Functional Accounting: Guide to Classifying Expenses
  • Chart of Accounts for Nonprofits: Guide to Proper Setup
  • Nonprofit Accounting Course: Essential Skills Training
  • GAAP for Nonprofits Sets New Standards for Financial Statements
  • Advantages of Fund Accounting Software for Nonprofits
  • New FASB Rules for Nonprofits: Are You Ready?

Did you find this article useful? We welcome your thoughts and comments.

Written by Joseph Scarano · Categorized: Accounting for Nonprofits · Tagged: Accounting Software for Nonprofits, Cost Allocations, Direct Cost Allocations, Functional Accounting, Fund Accounting, Fundraising, Nonprofit Accounting, Nonprofit Accounting Software, Nonprofit Audit, Nonprofit Fund Accounting Software

About the Author

Joseph Scarano is the CEO of Araize, Inc., developers of cloud-based FastFund Online Nonprofit accounting, fundraising and payroll software solutions to help your nonprofit become more transparent, accountable and sustainable.

Reader Interactions

Comments

  1. Christine Manor says

    August 22, 2018 at 11:19 am

    Thank you!

    Reply
  2. Bryan Wakefield says

    July 25, 2019 at 3:37 pm

    So when recognizing program revenue, would that be classified as Unrestricted or under the Program? For instance, a non profit theatre sells tickets to their shows. Their shows are Mission, so therefore program. But the income from that program is unrestricted revenue.

    Reply
    • Joseph Scarano says

      July 25, 2019 at 3:46 pm

      Bryan,

      The revenue generated for a Theater from ticket sales to show is Unrestricted Program Revenue.

      Restricted Revenue, or With Donor Restrictions, as the new terminology states is revenue designated for a specific purpose that has not been expended. For example, if the Theater holds a special performance and all proceeds from that performance are to be used for future renovations that will start next fiscal year, the ticket sales from that show are With Donor Designations (Restricted). Once the renovations begin, you would transfer the revenue to the Unrestricted Fund to match the renovation expense.

      Hope that answers your question.

      Joseph Scarano

      Reply

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