Fund based accounting is used in not-for profit organizations, charitable trusts and NGOs. It means, to classify all the short and long term revenue sources in to different funds. After this, we record different transactions relating to fund in its fund account. With this, we can track the revenues and expenses of any specific fund account.

Now, we explain the Steps of Accounting in Fund based accounting

1st step : Classify the Funds

In not profit organization, members do not bring the capital but they bring donation. Initial donation should be classify in different funds and fund accounts should be open. For example, we are have started a charitable trust for providing free education to orphan children. For this, we have got initial donation from our members. We can transfer this donation to different funds. We can make :

a) School Building Fund

b) Orphan Home Fund

c) Free Education Fund

d) General Expenses Fund

You can also classify more than above classification of fund.

2nd Step : Make the Budget

Before using the fund, it is the duty of accountant to make the budget. For example, we have to make school building. So, what will be the total cost of building? What expenses will be paid for constructing the building. What amount will we get  and from what sources will we get?

In above demonstration, you are seeing  both source and use of building fund which have been estimated through annual budget. If you are interested to study the detail of making budgets in any particular fund, you can study at here

3rd Step : Actual Record of Future Revenues and Expenses

Instead of making income and expenditure account, accountant should make the income and expenditure of each fund. With this, he can compare it with budget. So, future decision will become more easy.

4th Step : Measure the Performance of Fund

If donated fund is used effectively and honestly, it is the best performance of Fund. For measuring, the performance of project, we also make our financial statement on the basis of different funds. For example, we will be interested to know what current and fixed assets have been bought from school fund. We are also interested to know that every Rupee is consumed for the project or not.

Related : How to Calculate Corpus Fund

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