What Is a Fund in Accounting? Definition and Types

A fund in accounting serves as a distinct financial and accounting entity, designed to manage resources that are segregated for specific purposes or activities. This specialized approach ensures that financial resources are used in accordance with established limitations and requirements. Unlike traditional business accounting, which focuses on profitability, fund accounting prioritizes accountability and the demonstration of compliance with restrictions on how money can be spent.

Understanding a Fund in Accounting

In the realm of accounting, a fund represents a self-balancing set of accounts that records cash and other financial resources, along with related liabilities and residual balances. This segregation allows organizations to meticulously track resources allocated for particular programs, projects, or objectives. The core purpose of fund accounting is to provide a robust framework for accountability, ensuring that resources are utilized precisely as intended by donors, grantors, or legal mandates. The distinct nature of each fund means it operates with its own set of assets, liabilities, revenues, and expenditures, creating a separate financial picture. This structure is particularly important for entities that manage public or donated funds, where demonstrating adherence to specific spending rules is paramount.

Different Types of Funds and Who Uses Them

Various types of funds are employed depending on the nature of the organization and the source or restriction of its financial resources. Governmental entities, such as state and local governments, utilize a comprehensive fund structure to manage taxpayer money and ensure fiscal responsibility. These are broadly categorized into governmental funds, proprietary funds, and fiduciary funds, each serving distinct functions.

Governmental Funds

Governmental funds track resources used for traditional government services that are not primarily supported by user fees.
General Fund: The primary operating fund, accounting for most day-to-day activities and services like police and fire protection.
Special Revenue Funds: Established for specific revenue sources that are legally restricted for particular purposes, such as fuel taxes dedicated to transportation projects.
Capital Projects Funds: Account for resources designated for the acquisition or construction of major long-lived assets, including buildings and infrastructure.
Debt Service Funds: Used to accumulate resources for the payment of principal and interest on long-term debt.
Permanent Funds: Report resources that are legally restricted so that only earnings, not the principal, may be used for the government’s programs.

Proprietary and Fiduciary Funds

Proprietary funds, conversely, operate more like private-sector businesses, focusing on activities primarily financed through user charges. Enterprise Funds account for services provided to the general public for a fee, such as utilities like water and sewer services. Internal Service Funds provide goods or services to other governmental departments on a cost-reimbursement basis, often for centralized services like motor pools or printing. Fiduciary funds involve resources held by the government in a trustee or custodial capacity for external parties, meaning these funds cannot be used for the government’s own programs. Examples include Pension Trust Funds for employee retirement benefits and Custodial Funds for assets held temporarily on behalf of others.

Non-Profit Organizations

Non-profit organizations also employ a fund accounting approach, primarily classifying funds based on donor restrictions. However, current accounting standards simplify this to two main classes: “net assets without donor restrictions” and “net assets with donor restrictions.”
Net assets without donor restrictions represent resources that can be used for any purpose consistent with the organization’s mission, including funds designated by the organization’s governing board. Net assets with donor restrictions include resources whose use is limited by specific donor stipulations, which might relate to purpose (e.g., for a specific program) or time (e.g., available only after a certain date). These classifications ensure that non-profits transparently report how they are meeting their obligations to donors and managing resources according to specific agreements.

How Funds are Used in Financial Reporting

The structure of fund accounting directly influences how financial information is presented in an organization’s reports. For entities like governments and non-profits, financial statements are not solely focused on a single “bottom line” profit or loss, as is common in for-profit businesses. Instead, they provide detailed insights into the management and utilization of resources across different funds. Financial reports often include separate statements for each major fund or fund type, allowing stakeholders to see how resources are acquired and expended within each distinct area. For instance, a government’s financial report might show the financial position and activities of its general fund separately from a capital projects fund, detailing how tax revenues are used versus bond proceeds for infrastructure. Similarly, non-profit financial statements, such as the Statement of Financial Position and Statement of Activities, clearly differentiate between net assets without donor restrictions and those with donor restrictions.