Definition
In fund accounting, a government or other organization divides resources into funds, each a separate set of self-balancing accounts. Governmental entities use governmental funds (general, special revenue, debt service, capital projects, and permanent), proprietary funds (enterprise and internal service), and fiduciary funds. Nonprofits may also keep internal funds to track restricted gifts, though ASC 958 reports two net asset classes in the external statements.
Why it matters in an audit or review
Fund accounting shows compliance with legal and donor restrictions, so auditors test that transactions are recorded in the correct fund, that interfund transfers and balances eliminate in the government-wide statements, and that fund balances or net assets are properly classified. Cross-fund errors, such as paying general fund bills from a restricted fund, also create compliance findings.
Example
Illustrative: a town receives a $250,000 state grant for road repairs. It records the cash and revenue in a special revenue fund. If it spends $60,000 from the general fund on grant-eligible work, an interfund receivable of $60,000 is recorded in the special revenue fund once the grant reimburses the cost.
Common mistakes
- Running restricted activity through a general account.
- Not eliminating interfund balances in government-wide statements.
Sources
- GASB Statement No. 34 and GASB Codification Section 1300, Fund Accounting: https://www.gasb.org
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error