Money Matters

What is fund accounting? A complete guide to basics and best practices

Learn what fund accounting is, how it works, and why it’s essential for nonprofits managing restricted funds, grants, budgets, and financial reporting.

Published July 31, 202622 min read Share

This article was originally published on February 17, 2025 but has been refreshed and re-published with new content on July 31, 2026.

Accounting rules vary depending on the type of organization.

For-profit businesses primarily use accounting to measure profitability and overall financial performance.

Nonprofits, government bodies, and other mission-led organizations have an additional responsibility: they must show that money has been used for the purposes specified by donors, funders, and stakeholders.

That’s where fund accounting comes in: it’s the method these organizations use to meet that responsibility. Rather than treating all income and expenses as a single pool, fund accounting separates financial activity into distinct funds based on the source of the money, its intended purpose, and any restrictions attached to it.

For example, a grant awarded for a specific community program must be tracked separately from unrestricted income used to pay salaries, rent, or other operating costs. This helps organizations protect restricted resources, produce accurate financial reports, and demonstrate accountability to the people and institutions that support them.

In this guide, you’ll learn what fund accounting is, how it works for nonprofits, the main fund accounting principles and fund types, and how it affects budgeting, reporting, and day-to-day financial management.

Key takeaways

• Fund accounting is a specialized accounting method that helps nonprofits and other mission-driven organizations track money according to its purpose or donor restrictions, improving accountability and financial oversight.
• By separating restricted and unrestricted funds, organizations can comply with donor requirements, produce accurate financial reports, make better budgeting decisions, and demonstrate responsible stewardship.
• The core principles of fund accounting include separating funds, adhering to restrictions, maintaining accurate fund balances, ensuring transparency, and producing consistent financial reporting.
• As nonprofits grow and manage more grants, programs, and reporting requirements, purpose-built fund accounting software can simplify fund tracking, automate reporting, and reduce the risk of manual errors.

Here’s what we’ll cover

What is fund accounting?

Fund accounting is a specialized method of accounting used by nonprofits, charitable organizations, religious groups, educational organizations, and government entities to manage and track financial resources, ensuring that money is used in line with its intended purpose and any restrictions attached to it.

Rather than treating all income and expenses as a single pool, fund accounting separates financial activity into distinct funds based on the source of the money, its purpose, and how it can be spent.

As a result, organizations gain clearer financial oversight, better protect restricted resources, and support more accurate budgeting, reporting, and decision-making.

What is a fund?

A fund is a distinct group of financial resources within a nonprofit organization that is tracked separately from other finances because it has a specific purpose, program, project, or restriction.

Each fund has its own financial activity and remaining balance, allowing the organization to see how much money it has received, how much it has spent, and what remains available for the intended purpose.

Examples include general operating funds, restricted grant funds, scholarship funds, and capital campaign funds.

For example, imagine a donor gives a nonprofit $10,000 specifically for a scholarships. The organization must track that donation separately and use it only for eligible scholarship costs.

The money can’t be directed to payroll, rent, or any other general operating expense (even temporarily), unless the donor formally modifies or releases the restriction.

What types of organizations need fund accounting?

The main types of organizations that use fund accounting are nonprofits, government bodies, educational institutions, and religious organizations.

What these organizations have in common is that they often receive money from several sources, and not all of it can be used in the same way. Donations, grants, taxes, tuition, contracts, and endowments may each come with their own purpose, conditions, or reporting requirements.

Fund accounting helps you keep those resources separate, understand what money is available, and show donors, regulators, governing bodies, and other stakeholders that it has been used responsibly.

Nonprofit organizations

If you work for a nonprofit, you may be managing donations, grants, membership income, program revenue, and other funding sources at the same time. Some of that money may be available for general operating costs, while other amounts must be used for a specific program, project, or period.  

For example, your organization might receive an unrestricted donation that can help cover salaries and rent alongside a government grant that can only fund a particular community program.

Fund accounting allows you to track both sources separately, monitor what has been spent, and see how much remains.

This is particularly valuable for charities, foundations, healthcare nonprofits, associations, and other organizations managing several programs or grants.

Purpose-built nonprofit accounting software, including accounting software for foundations and philanthropic charities, can make this process more manageable, by helping your finance team track restrictions, allocate transactions, and produce fund- and grant-level reports.

Government bodies

Government bodies, from the local to federal levels, use fund accounting to manage public money and demonstrate that taxes, grants, fees, and other revenue have been spent for authorized purposes.

A local government, for instance, may need to keep money for road improvements separate from funding for public health programs or everyday operations.

Organizing resources into distinct funds makes it easier to monitor spending, prevent money from being used for the wrong purpose, and report clearly to the public.

Governmental fund accounting follows specific US accounting and reporting standards and is generally more formal than the internal fund tracking used by many nonprofits. Accounting software for government and public benefit organizations can help teams manage these requirements and produce the necessary fund-level reports.

Educational institutions

Colleges, universities, and K-12 schools may use fund accounting to manage tuition revenue, government funding, research grants, scholarships, donations, and endowments.

Fund accounting makes this possible by keeping the financial activity for each purpose clearly organized. It also helps institutions report accurately to grantors, donors, governing boards, and regulators.

The exact approach depends on the institution. Public schools and universities may follow governmental accounting requirements, while private nonprofit institutions generally follow nonprofit accounting standards.

Religious institutions

Churches and other religious organizations also use fund accounting to track donations given for different ministries, programs, and projects.

For example, your church may receive general offerings to cover everyday expenses alongside donations for community outreach, missionary work, building repairs, or a church capital campaign.

By giving you a clearer picture of which resources are available and which carry restrictions or designations, fund accounting supports better budgeting and financial decision-making. It also helps you report transparently to your congregation, donors, board, and other stakeholders.

Why is fund accounting important for nonprofits?

Fund accounting is important for nonprofits because it helps your organization use, track, and report money in line with donor restrictions, grant conditions, and internal priorities.

By separating resources according to their purpose, you can see what money is available for day-to-day operations, what must be spent on specific programs, and whether your organization is meeting its financial commitments.

This supports better decision-making while giving donors, grantors, boards, and regulators greater confidence in how funds are managed.

Use funds for their intended purpose

Fund accounting gives your finance team a clear view of how resources are allocated and whether spending aligns with donor or grant requirements.

For instance, imagine your nonprofit has $25,000 allocated to a youth program, $15,000 for community outreach, and $10,000 for a building renovation. Each amount must be tracked separately so money intended for one purpose is not accidentally spent on another.

If a grant covers $20,000 of the youth program’s costs, your organization may choose to fund the remaining $5,000 from unrestricted sources. However, it shouldn’t use money restricted to outreach or building renovations unless the relevant restriction is formally modified or released.

This separation helps your organization protect restricted resources while making informed decisions about where unrestricted money is most needed.

Support compliance and accurate reporting

Fund accounting helps nonprofits maintain the detailed records needed to meet financial reporting, grant, donor, and tax requirements.

For example, tax-exempt organizations must file an annual return from the Form 990 series and provide information about their activities, finance, governance, and use of resources.

Grantors may also require separate reports showing how an award was spent and whether the organization met the conditions attached to it.

Tracking financial activity by fund throughout the year makes it easier to prepare accurate reports and follow applicable Financial Accounting Standards Board (FASB) requirements. It also reduces the risk of having to reconstruct fund activity when a filing, audit, or grant report is due.

Build trust with donors and grantors

When people support your organization, they want confidence that their money is making the difference you promised it would.

Clear fund-level records allow you to show how restricted donations and grants have been used. For instance, if a donor gives $5,000 to support a scholarship program, you can report on how much has been awarded, what remains available, and whether the fund is on track to meet its purpose.

This transparency strengthens accountability and can help turn a one-time contribution into a long-term relationship. It also gives grantors and major donors the evidence they need when deciding whether to provide future funding.

Improve budgeting and financial planning

Fund accounting gives you a more useful view of your finances than an organization-wide balance alone.

A nonprofit may appear to have plenty of money overall while having only a small amount available for general operating costs. The rest may be restricted to particular programs, projects, or future periods.

By budgeting and monitoring resources at the fund level, you can identify where money is available, where funding gaps are developing, and whether individual programs are financially sustainable. This helps your leadership team make better decisions about hiring, program delivery, fundraising, and future priorities.

Manage liquidity and allocate resources effectively

Not all money held by a nonprofit is immediately available to spend.

Restricted donations, reimbursement-based grants, endowment assets, and funds designated for future projects may offer limited support for today’s payroll, rent, or urgent operating costs. Unrestricted cash may be much more flexible, but it still needs to be managed carefully.

Fund accounting helps you distinguish between the resources your organization holds and the resources it can actually use.

With a clearer picture of available cash and fund balances, you can plan for upcoming commitments, maintain appropriate reserves, and avoid making decisions based on money that is restricted or not yet accessible.

What are the five key principles of fund accounting?

The five key fund accounting principles are accountability and transparency, separation of funds, adherence to fund restrictions, accurate tracking of fund balances, and consistent financial reporting.

Together, these principles help your nonprofit understand where its money came from, what it can be used for, how much remains available, and how that activity should be reported.

Keeping them in mind gives your finance team a strong foundation for managing resource responsibly and meeting donor, grantor, board, and regulatory expectations.

Here are the five basics of fund accounting:

1. Accountability and transparency

Fund accounting is built on the principle of accountability. Your nonprofit organization needs to be able to show donations, grants, and other resources were received, managed, and spent.

Clear records make it easier to demonstrate that your organization has followed donor instructions, grant conditions, internal policies, and applicable reporting They also give your board, donors, grantors, and other stakeholders a clearer view of how financial resources are supporting your mission.

For example, if your organization receives a grant for a youth employment program, you should be able to show how much was received, which costs were charged to the grant, and how much remains available.

2. Separation of funds

Fund accounting keeps financial resources separate according to their purpose, source, or restrictions.

This does not necessarily mean holding every fund in a different bank account. Instead, your accounting records should allow each transaction to be assigned to the correct fund so you can track its income, expenses, and remaining balance independently.

For example, money raised for a new community center should be recorded separately from unrestricted income used for salaries, rent, and utilities. This makes it easier to monitor both areas without confusing resources that serve different purposes.

Common fund types include:

• General operating funds: used for nonprofit’s day-to-day activities.
• Restricted grant funds: used according to the terms of a particular grant.
• Capital campaign funds: raised for major initiatives, like purchasing or renovating a building.

3. Adherence to fund restrictions

One of the main principles in fund accounting is distinguishing between restricted and unrestricted funds.

Your nonprofit must understand and follow any restrictions attached to the money it receives. Under current US nonprofit accounting standards, resources are generally reported as either:

• Net assets without donor restrictions: resources that are not limited by donor-imposed conditions and can generally be used to support the organization’s mission.
• Net assets with donor restrictions: resources that must be used for a particular purpose, within a specified period, or in accordance with another donor-imposed requirement.

A restriction may be satisfied when your nonprofit spends the money on its intended purpose or when a specified period passes. Some gifts, such as certain endowments, may require the original contribution to be maintained while allowing your organization to use some or all of the investment return.

It is also important to distinguish donor restrictions from board designations. Your board may set aside unrestricted resources for a particular purpose, but it generally retains the authority to change that decision. A donor-imposed restriction cannot usually be changed internally in the same way.

4. Accurate fund balances and appropriate reserves

Your finance team needs to know how much remains available within each fund and whether those resources can support future spending.

A fund balance shows the resources remaining after the fund’s financial activity has been recorded. Reviewing these balances regularly helps you spot overspending, unused grant money, upcoming commitments, and funding gaps before they become larger problems.

Your nonprofit may also choose to maintain operating reserves to prepare for unexpected costs, delays in funding, or periods of lower income. A clear reserve policy can explain how much should be retained, when the money can be used, and who has authority to approve its use.

However, a healthy overall balance does not always mean you have enough money available for general operations. A large proportion may still be donor-restricted or committed to particular programs.

5. Consistent financial reporting

Fund accounting should produce clear, consistent reports that show how your nonprofit’s resources have been managed.

Internal reports may break financial activity down by fund, grant, program, department, or project so your leadership team can monitor budgets and make informed decisions.

External financial statements generally present the organization as a whole while distinguishing between net assets with donor restrictions and net assets without donor restrictions.

Key nonprofit financial statements include:

• A statement of activities: shows revenue, expenses, gains, losses, and changes in net assets during the reporting period.
• Statement of financial position: shows the organization’s assets, liabilities, and net assets at a particular point in time.
• Statement of cash flows: shows how cash moved through operating, investing, and financing activities.
• Statement of functional expenses: shows expenses by both their purpose, such as programs or administration, and their nature, such as salaries or rent.

Maintaining accurate fund-level records throughout the year makes it easier to prepare these statements, complete applicable Form 990 series filings, respond to audits, and meet reporting requirements.

Accounting software can further streamline this process by automating reports and generating GAA-compliant financial statements.

What are the different types of funds in fund accounting?

Common types of funds in nonprofit fund accounting include operating funds, restricted funds, endowment funds, and capital campaign funds. Government organizations may also use categories such as capital projects, debt service, special revenue, and permanent funds.

Each fund helps your organization track money according to its purpose, source, and any restrictions attached to it.

• Operating funds: cover everyday expenses like staff salaries, rent, and utilities. They are typically supported by income without donor restrictions, although your organization may still track different operating activities separately.
• Restricted funds: hold donations or grants that must be used for a particular purpose or within a specified period. For example, a donor may restrict a gift to a scholarship program or a grantor may provide funding for a defined project. Once the purpose or the time restriction has been satisfied, the restriction may be released.
• Endowment funds: are designed to provide long-term financial support. Depending on the donor agreement and applicable law, the original gift may need to be maintained while some or all of the investment return can be used to support the organization.
• Capital campaign funds: track money raised for a major project, such as purchasing, constructing, or renovating a building.

Depending on the type of organization, other fund may also come into play, such as:

• Permanent funds: used in government accounting when the principal must generally remain intact and the earnings support public programs or services.
• Capital project funds: used by government bodies to account for for large-scale construction or infrastructure projects.
• Debt service funds: used to account for money set aside to repay certain loans, bonds, or long-term debt.
• Special revenue funds: used by government bodies to track revenue that is restricted or committed to a specific purpose.

How fund accounting works in nonprofit finance

Fund accounting for nonprofits isn’t just a set of bookkeeping rules. It shapes how your organization budgets, records transactions, reports financial activity, and demonstrates accountability day to day.

Understanding how it plays out in practice is especially useful if you’re setting up these processes for the first time.

Budgeting by fund

Rather than relying on a single organization-wide budget, nonprofits often budget by fund, grant, program, or project. ach budget reflects what the money can be spent on, which means your organization may be managing several smaller financial plans alongside its overall budget.

Common examples include:

• Restricted grant funds: budgeted according to the specific terms set by the grantor.
• Capital campaign funds: budgeted against a defined project, such as purchasing or renovating a building.
• General operating funds: budgeted more flexibly to cover day-to-day costs like salaries, rent, and utilities.

The chart of accounts

A nonprofit’s chart of accounts needs to capture the purpose and restriction of financial activity as well as the type of transaction.

Rather than relying on a flat list of income and expense categories, your organization may assign each transaction with:

• The relevant fund, grant, or program.
• It’s donor-restricted status.
• The type of income or expense, such as donations, salaries, or utilities.

For example, a donation might be recorded against a restricted building fund rather than simply grouped with general contribution revenue. This structure makes it possible to produced detailed, fund-specific reports later without re-sorting transactions manually.

Financial statements

Nonprofit financial statements present the organization’s overall financial position and activity while distinguishing between net assets with donor restrictions and net assets without donor restrictions.

Key statements include:

• Statement of activities: similar to an income statement, it shows revenue, expense, gains, losses, and changes in net assets.
• Statement of financial position: similar to a balance sheet, it shows asset, liabilities, and net assets at a particular point in time.

Your internal reports may provide further detail by fund, grant, program, or project. This allows your leadership team to see how much of the organization’s money is available for general use and how much is restricted or committed to specific activities.

Annual reporting

At year-end, accurate fund-level records support your nonprofit’s annual reporting obligations, including applicable Form 990 series filings and reports required by individual grantors, donors, or governing bodies.

Because each source of funding has been tracked throughout the year, preparing these reports becomes a matter of compiling and reviewing existing records rather than reconstructing how money was spent after the fact.

Maintaining this level of detail manually becomes harder as your nonprofit grows. This is one of the main reasons many nonprofits start their search for fund accounting software sooner rather than later: not to replace the underlying principles, but to make them easier to apply consistently.

What are the steps in the fund accounting process?

The fund accounting process typically follows five steps: budgeting and planning, recording transactions, tracking fund usage, generating financial reports, and reviewing financial activity.

Together, these steps ensure that every dollar is allocated, spent, and reported in line with its intended purpose.

Step 1: Budget and plan

Before recording anything, identify the funds, grants, programs, and projects your organization needs to track, then set clear budgets based on available resources and any restrictions attached to them.

Step 2: Record transactions

Record all income and expenses, making sure each transaction is assigned to the correct fund, grant, program, or project.

Step 3: Track fund usage

Review fund balances and budget performance regularly to see what’s been spent, what remains available, and whether resources are being used as intended.

Step 4: Generate financial reports

Regularly produce reports to monitor financial activity, support decision-making, and meet board, donor, grantor, tax, and other reporting requirements.

Step 5: Reviewing and auditing

Reconcile accounts and review transactions, balances, and supporting documentation for accuracy at the end of each accounting cycle.

Depending on your organization’s size and requirements, this may also include oversight from management, the board, an audit committee, or an independent auditor.

Real-world fund accounting examples

Across sectors, fund accounting provides a consistent framework for managing restricted resources and demonstrating financial stewardship. Whether it’s nonprofits, government agencies, or universities, each uses fund accounting to ensure funds are tracked for the right purpose.

These examples show how different organizations put fund accounting principles into action to stay on track and use their resources responsibly.

Nonprofit: The American Red Cross

The American Red Cross tracks financial resources according to donor restrictions and reports spending across distinct program areas. Its audited financial statements separate net assets with and without donor restrictions and show program expenses for services such as domestic disaster relief, biomedical services, training, and international relief.

Government: The City and County of San Francisco

The City and County of San Francisco uses separate governmental funds—including its General Fund, special revenue funds, and enterprise funds—to track revenue and spending for different public purposes. This approach helps the City monitor dedicated revenue, comply with legislative requirements, and report how public resources are used.

Education: Harvard University

Harvard University’s endowment fund is made up of approximately 14,765 individual funds invested together, many of which are restricted by donors to specific purposes such as scholarships, professorships, and academic programs. The University distributes a portion of the endowment each year while retaining the remainers to support future generations.

Fund accounting best practices

In fund accounting for nonprofits, accuracy, transparency, and compliance are crucial. Following these best practices can help your organization manage financial resources effectively and meet its financial responsibilities.

Categorize funds clearly

Set up funds, grants, programs, and projects according to what your organization genuinely needs to track.

For example, donations made to a specific capital campaign should be distinguished from resources available for general operating costs. Clear naming conventions can also help your finance team apply categories consistently.

Implement strong internal controls

Establishing strong internal controls protects your organization from errors, misuse of funds, and fraud.

These may include approval procedures, access controls, regular reconciliations, and separation of duties. For example, where possible, the person recording a payment should not be the only person responsible for approving it.

The controls you need will depend on your organization’s size, staffing, risks, and reporting requirements.

Keep detailed records

Record each donation, grant, and other source of income accurately, including any restrictions or conditions attached to it.

You should also retain supporting documentation and use your chart of accounts consistently so every transaction can be traced to the appropriate fund, grant, program, or project.

Follow applicable reporting standards

Use consistent accounting policies and follow the reporting standards that apply to your organization. For many US nonprofits, this means preparing financial statements in accordance with generally accepted accounting principles established by FASB

Reports like the statement of activities, statement of financial position, and the statement of cash flows can help stakeholders understand how resources have been managed.

Use fund accounting software

Nonprofit accounting software can help you track multiple funds, grants, programs, and restrictions without relying on disconnected spreadsheets.

For example, Sage Intacct can support fund and grant tracking, dimensional reporting, and the preparation of nonprofit financial reports. Automation can save time, improve consistency, and reduce the risk of manual errors, although your organization remains responsible for reviewing its records and meeting its reporting obligations.

Consider outsourcing for expert support

If your team doesn’t have the expertise or capacity to manage fund accounting internally, ou may choose to work with a nonprofit accountant, bookkeeper, or outsourced finance provider.

External support can be particularly valuable when setting up your accounting structure, preparing financial statements or tax filings, managing complex grants, or getting ready for an audit.

Fund accounting versus traditional accounting

Fund accounting and traditional accounting both provide structured records of financial activity, but they serve different organizational needs.

	Fund accounting	Traditional accounting
Primary purpose	Demonstrates accountability for restricted resources.	Measures overall business performance and profitability.
Resource management	Tracks funds separately based on donor, grant, legal, or contractual restrictions.	Allocates resources according to business priorities.
Reporting	Focuses on net assets and fund-level reporting.	Focuses on company-wide financial statements and performance.
Compliance	Must satisfy donor, grant, regulatory, and nonprofit reporting requirements.	Follows applicable accounting, tax, and, where relevant, securities regulations.
Success is measured by	Responsible stewardship and proper use of funds.	Profitability, growth, and financial health.

Organizational focus

Fund accounting is designed for organizations that need to track resources according to their purpose or restrictions. It emphasizes accountability by helping nonprofits and other organizations demonstrate how donations, grants, and public money have been used.

Traditional commercial accounting is primarily used by for-profit businesses and focuses on measuring overall financial performance, profitability, cash flow, and financial position.

Resource allocation and flexibility

In fund accounting, resources may need to be tracked separately because donors, grantors, laws, contracts, or governing bodies have specified how they can be used.

For-profit businesses generally have more flexibility to reallocate resources according to their commercial priorities, although they may still track activity by department, product, project, or other business segment.

Reporting differences

Nonprofit financial statements report changes in net assets and distinguish between net assets with and without donor restrictions. Internal reports may provide additional detail by fund, grant, program, or project.

For-profit businesses typically use financial statements such as the income statement, balance sheet, statement of cash flows, and statement of shareholders’ equity to report their overall financial performance and position.

Regulatory and compliance requirements

US nonprofits may need to follow FASB accounting standards, grant and donor requirements, state regulations, and applicable Form 990 series filing rules.

For-profit businesses also follow applicable accounting and tax requirements. Public companies have additional reporting obligations under securities laws and regulations, while private-company requirements vary according to factors such as ownership, lenders, and contractual agreements.

Accountability versus profit

Fund accounting prioritizes stewardship and accountability, helping stakeholders see whether resources have been used for their intended purposes.

Traditional accounting places greater emphasis on commercial performance and profitability. However, both approaches depend on accurate records, effective controls, and reliable financial reporting.

Take control of your nonprofit’s fund accounting

Fund accounting can feel complex at first, but once the core principles click, it becomes one of the most valuable tools your organization has for staying accountable, compliant, and trusted by the donors and stakeholders who support your mission.

Whether you’re setting up fund accounting for the first time or looking to streamline an existing process, the right systems make it far easier to track funds accurately, generate the reports you need, and spend more time focused on your mission rather than manual bookkeeping.

Explore our nonprofit accounting software to see how Sage supports fund accounting, reporting, and compliance for nonprofits, government bodies, and other mission-led organizations.

Fund accounting frequently asked questions

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