In order to understand nonprofit accounting, it is important to know the difference between funds and programs. A true nonprofit accounting system tracks revenue from funds and expenses by programs or functional areas.
Main Difference Between Funds and Programs
Funds are used for classifying revenue only, whereas Programs are used for categorizing your expenses by functional areas:
- 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.
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.
- 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.
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.
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.
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