Activities can be accounted for separately by setting up separate funds for the balances and transactions of those activities. A fund is a self-balancing set of accounts within the statements. The assets, liabilities, net assets, revenues and expenses relating to a given activity come together to form a separate fund - a set of financial statements within the statements. In reality, every organization has at least one fund, or one self balancing set of accounts, but where there is more than "one fund," we say the organization is using fund accounting. An organization may have any number or combination of general and restricted funds.
Fund accounting can perhaps best be understood through a look at the trial balance. Examine the 1999 trial balance for the SpringTime organization.
December 31, 1999
|Bank - operating account||350|
|Bank - capital account||150|
|Flower Pin Inventory||300|
|Bank loan - current portion||130|
|Deferred capital contributions||400|
|Flower Pin revenue||450|
|Flower Pin cost of sales||150|
|Capital contributions recognized||50|
|Spring Fling revenue recognized||500|
|Spring Fling expenses||400|
This organization currently only has one fund, a general fund. But you will notice that we can separate the capital activities from other activities. The capital activities are highlighted in yellow. We can now easily create two general funds for this organization, an operating fund and a capital fund, and present two self-balancing sets of accounts, see attached. In doing so, we have to split the opening net asset balance into opening fund balances for the operating and capital funds. Alternatively we can present one trial balance comprised of two funds, see attached.
Our above example is presented using the deferral method of accounting for contributions. Under the deferral method of accounting for contributions, an effort is made to match contributions with the related expenses. In the above example, capital contributions have been deferred, set aside as liabilities, until recognized as revenue. These contributions will be brought into revenue to offset the related amortization of the assets purchased with these contributions. As you can see only $60 of these contributions have been recognized in the current period, to match $60 of the amortization of the assets that were purchased with these contributions.
The CICA Handbook does not require the matching of contributions with expenses where the organization is following the restricted fund method of accounting for contributions. (4410.10) Under the restricted fund method, the organization can recognize the contributions immediately in a designated "restricted fund." On the attached page, we represent the capital fund trial balance as a restricted fund.
Required Disclosure for Fund Accounting
A description of the purpose of each fund reported is required. (4400.06)