Fund based Accounting

A Fund Based Accounting is a system of book-keeping under which separate funds for different purposes are created in the books of account. All the revenue concerned with each fund is added to that particular fund, and expenses are deducted from that fund only. The purpose of doing so is to ensure that funds are being used only for the purpose they have been created. A Fund Based Accounting is generally used by Not-for-Profit organisations or Charitable organisations to maintain the records of their incomes and expenses. Just like a profitable organisation, these organisations also prepare the Financial Statements and Balance sheets at the end of a specific period, not with the motive to detect the net profit/net loss, but to find the surplus or deficit of the organisation.

The Financial Statement of Non-Profit organisations consist of the following statements:

1. Receipts and Payment Account: The Receipts and Payment Account is a summary of cash and bank transactions of an organisation over a certain period. It is merely a cash book summary.

2. Income and Expenditure Account:  The Income and Expenditure Account is a Profit and Loss Account for a Not-for-profit organisation. It is prepared with a motive to ascertain the surplus or the deficit arising out of the activities of the organisation during a specific period of time.  The Income and Expenditure Account is prepared similarly to the Trading and Profit and Loss Account for a profitable business is prepared.

3. Balance Sheet: Just as in the case of a trading business, the Balance Sheet is prepared under fund accounting to show the financial position of an organisation at the end of the accounting year. The Balance Sheet is prepared on basis of the information provided under the Income and Expenditure Account.

Classification of Funds:

Funds under Fund Based Accounting are classified under two categories:

1. General Fund or Capital Fund (Unrestricted Fund): 

A capital fund is a difference between the assets and the liabilities of the Not-For-Profit Organisation. This fund is created out of donations, grants, and gifts to undertake the general activities of the organisation. This means such a fund is not created for a specific purpose, and this makes it different from special funds. For Example, Fund to purchase the fans for the office.

Accounting treatment of General Fund:

All the general recurring expenses are charged directly to the general fund through the Income and Expenditure Account, and all the general recurring Incomes are added to the general fund directly through the Income and Expenditure Account. 

Illustration:

Prepare the Income and Expenditure Account for the followings items when they are charged to the capital fund:

Solution:

2. Special Fund (Restricted Fund): 

When the fund is created for a specific purpose and can be used for that particular purpose only, then such fund is called a Special Fund. This fund is used only for the purpose for which it has been created. This fund is further classified as:

A. Asset Building Funds: Specific Asset Building Funds are created to build or acquire some fixed assets. These funds are directly shown on the liability side of the Balance sheet. For Example, Building Fund.

B. Revenue Funds: Specific Revenue Fund is created to meet specific recurring expenses, like Tournament expenses, Scholarship expenses, etc. A Revenue Fund is a restricted fund, and hence is shown on the liability side of a Balance sheet. For Example, Endowment Fund, Tournament Fund, etc.

Accounting treatment of an Asset Building Fund: 

An Asset Building Fund is recorded on the liability side of the Balance Sheet. Any increase in income from that fund will be added to that particular fund in the Balance sheet, and expenses will be deducted from that fund itself. Further, once the purpose of the fund is served, any left-out balance will be shown on the liability side of the Balance Sheet and shall be treated as the liability of the organisation. It shall be also noted that if such fund is being invested somewhere, then the amount invested shall be separately recorded on the asset side of the Balance Sheet. Any interest amount received on such investment shall be added to the fund.

Illustration:

There is a Building Fund of ₹25,00,000, and it has been invested @10% p.a. Show the accounting treatment of Building Fund in Balance Sheet.

Solution:

Accounting treatment of a Revenue fund:

A revenue fund is used to charge specific expenses that are of recurring nature. The revenue fund is shown on the liability side of the Balance sheet. In case there is enough fund, the expenses related to that specific purpose are directly deducted from such fund, and any leftover balance continues to show on the liability side of the Balance sheet. However, in case the fund balance is insufficient to meet the expenses, then such excess expense is recorded on the Expenditure side of the Income and Expenditure Account and is charged indirectly to General Fund.

Case A: When Fund is sufficient, and expenses are less than the fund available.

Illustration:

Show the treatment of the Football Tournament Fund from the following information:

Solution: 

Case B: When Fund is insufficient and expenses are more than the Fund available.

Illustration:

Show the treatment of the Football Tournament Fund from the following information:

Solution: 

Note: No balance will appear on the liability side of the Balance sheet as there is zero balance in the Football Tournament Fund.   

Illustration:

Prepare the Income and Expenditure Account and Balance sheet for the year ending 31st March, 2021 for the Geeks Sports Club from the following information:

Solution: