Fund Accounting - What is fund accounting, key principles, and responsibilities (2024)

Want to learn more about Fund accounting? In this post, we cover the basics of Fund accounting. Learn about what it is, job responsibilities and more.

Fund accounting

Fund accounting is an accounting system used to track the amount of cash assigned to different purposes by a non-profit entity. Here, the main focuslies in accountability instead of profitability. In this blog, we will learn more about fund accounting, its principles, and related terminologies.

What is fund accounting?

What is fund accounting? It is a method used by non-profit organizations and governments for the accountability of funds and grants received from donors. Through this,the non-profit entity focuses more on tracking and justifying the use of available funds.

There can be two types of funds, restricted and unrestricted. Restricted funds are used for a specific purpose while unrestricted funds can be used for general purposes.

Also Read: Expanded accounting equation | A complete guide

Related terms in fund accounting

Fund accounting refers to the management of the financial records of an investment fund. Depending on the type of investment and the amount of investment, there can be different types of fund accounting. Let us discuss three terms related to fund accounting and their respective characteristics,

1. Hedgefund accounting

A hedge fund pools the money of all the participating investors and tries to achieve above-market returns through different varieties of investment strategies. A hedge fund typically does not accept small contributions. Hedge fund accounting attempts to reduce the volatility arising due to repeated adjustment to financial instrument’s value.

2. Mutual fund accounting

Mutual fund accounting is an accounting practice used to make correct financial reports for mutual funds. Here, there are two major parties responsible for maintaining accounts of mutual funds, one is the investor who invests money in mutual funds and the second is the asset management company.

3. Private equity fund accounting

Private equity fund accounting should accommodate privately held companies since private equity funds are not traded publicly. Private equity fund accounting must be adjusted to clearly outline the financial situation and operation of the private equity fund. Private equity accounting is complex and unlike other investment vehicles.

Also read: Tax consultant | Everything you need to know

Fund accounting principles

Accounting principles apply to all kinds of institutions including government, businesses, nonprofit organizations, etc. We will discuss some of the common fund accounting principles below,

• Accountability and records of donations made to the nonprofit organization
• Fund investment accounting principle dictates that the account reporting should go to the individual investor
• Unrestricted net assets temporarily restricted net assets, and permanently restricted net assets are considered to determine where and when to invest
• Documenting revenues and expenses in non-profit entities

Responsibilities of a fund accountant

Fund accountants are involved in several responsibilities including daily reporting, conducting research, making balance sheets, managing funds, NAV reporting, etc. The responsibilities may vary depending on your position and experience in the field. Let us look at some of the responsibilities in more detail,

1. Fund accounting basics

Fund accountants are responsible for day-to-day accounting activities for a group of assigned funds. They are required to calculate monthly or weekly financial statements along with income and expense accruals. Fund accounting includes giving accounting for portfolios of investment such as securities, commodities, real estate, etc.

2. Fund account research

Thismay get involved in conducting research in support of fund management. For eg, they may compare the performance of several funds and prepare reports based on the gathered data to be used by the management. Fund accounting can include researching the effect of certain actions on fund values.

3. Identifying investment accounting discrepancies

Fund accountants help in identifying any issues or irregularities with accounting records or fund activities. They have an eye for detail and use their analytical skills to assess probable issues in advance. Fund accounting involves scheduling audits, making compliance reports, and preparing financial reports.

4. Hedge fund accounting

Hedge fund accountants provide accounting services and performance analysis to hedge funds. Their job role includes maintaining general ledgers, preparing financial statements, calculating net asset value, and other record-keeping and housekeeping activities. Hedge fund accountants work closely with portfolio managers to develop specific investment strategies.

5. Fund accounting journal entries

Journal entries are created to keep a track of expenses. In fund accounting, a journal is maintained that keeps a record of all the incoming cash from donors and the expenditure done by the non-profit entity. Accountants maintain journals so that donors know where their funds are going.

Also read: A guide to remote accounting jobs

6. Accounting for investments

The accounting for investment is done by fund accountants when funds are paid for an investment instrument. Based on the intent of the investor and the size of the investment, the fund accountant decides what sort of accounting for investment should be considered amongst trading security, equity method, etc.

7. Fund balance accounting

Fund balance is an accumulation of revenues minus expenditures. To understand fund balance, it is important to understand fund accounting. That is why fund accountants are usually trusted by entities to carry out the fund balance accounting task. They prepare balance sheets to track all the expenses.

8. Accounting for restricted funds

When cash is taken out of the business and put in a restricted fund, meaning it is set aside for a specific function or future plans, the transaction must be recorded in accordance with generally accepted accounting principles, or GAAP. Keeping an account of restricted funds is a part of fund accounting responsibilities.

9. Temporarily restricted funds

Temporarily restricted funds are those funds that were received from the donor with certain restrictions that will be satisfied in the future. Itisresponsible for keeping a record of such funds and ensure that they are only being used once the restriction has been lifted.

10. Deal with investment accountant

A fund accountant manages the finances of a specific fund. Their work includes generating financial reports, controlling transactions, managing fund activity, investment accounting, and more. They often deal with investment managers as part of their job. The fund accountant plays the role of a key communicator between clients and their employers.

Also Read: Small business consulting | A how-to guide for everyone

11. NAV accounting calculation

Net asset value or NAV is the company’s total asset value less its liabilities. Assets are what the fund owns and liabilities are what the fund owes. Fund accountants are responsible for timely and accurate execution and reporting of net asset valuations for the client’s accounts.

Fund accountant job description

Fund accounting provides accurate and timely accounting services in line with their business needs. The typical fund accountant job description includes different responsibilities, duties, and qualifications required to be eligible for the position,

• Ensure maintenance of service level agreements, memorandum, and client delivery summaries
• Ensure team members comply with operating policies, guidelines, and procedures while carrying out fund accounting processes
• Demonstrate excellent interpersonal and communication skills
• Must possess strong knowledge of fund operations including valuation, accounting, and payment procedures
• Act as a point of contact for complex client issues
• Ensure efficient trade processing to produce and deliver reports to clients in an accurate and timely manner
• Excellent time management skills and possess good attention to detail
• Proven ability to multitask
• Ensure fund administrator reporting is accurate and produced in time
• Stay up-to-date with accounting principles and procedures
• Able to monitor and manage cash flow and expenses

Also Read: How to prioritize task | Everything you must know

What is government fund accounting?

Government fund accounting is similar to non-profit fund accounting because they both use an accounting model different from the traditional one. Thismethod relies on revenue from multiple resources and has certain restrictions on the usage of these funds. Government fund accounting uses the words such as deficit and surplus instead of using profit and loss as the main focus is on accountability instead of making a profit.

What is encumbrance accounting?

An encumbrance is referred to restricted funds inside an account reserved for specific debts or future liability. Encumbrance accounting is helpful in tracking anticipated spending to budgeted amounts. Also known as commitment accounting, this is focused on more effective and controlled cash planning.

It is a two-step process, first, you encumber newly entered purchase order line items into General Ledger and then unencumber the line items once they go into an Accounts Payable invoice for payment.

Also Read: Managing remote teams | A priceless list of tips to succeed

Restricted vs designated funds

Restricted funds – Restricted funds are basically money given for a specific purpose. The donor determines whether the funds are restricted or not. When it comes to spending restricted funds, it has some limitations. Restricted funds can only be restricted by the donor.

Designated funds – Designated funds are also restricted for specific purposes and agendas but unlike restricted funds, the designated funds are set aside by the non-profit entity itself. They are permanently restricted for that purpose or future spend and are not used by non-profit for general purposes. Designated funds can be transferred to unrestricted funds in emergency cases.

What is the primary reason that governmental entities use fund accounting?

Many governmental entities use fund accounting while reporting their financial statements in order to provide greater transparency to the donors. Fund accounting promotes control and accountability over restricted resources. Ithelps the government keep track of all the funds received from donors and expenditures. Government receive most of their funds from taxpayers and therefore require to be completely transparent about how the funds are allocated and spent.