5-1 Short Paper- Fund Accounting, Nonprofit Entities, and Government Entities

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5-1 Short Paper: Fund Accounting, Nonprofit Entities, and Government Entities Nicole Sheppard Southern New Hampshire University ACC 405 – Advanced Accounting Skye Osborne November 26, 2023

Fund Accounting, Nonprofit Entities, and Government Entities According to Indeed’s Editorial Team, “fund accounting is an accounting system that nonprofit organizations (NPOs) and government agencies use to ensure the accurate expenditure of financial resources” (2022). This form of accounting is used by nonbusiness organizations that are organized to provide a desirable service without any regard for financial gain. Nonbusiness organizations include governmental units, hospitals and other healthcare providers, colleges and universities, voluntary health and welfare organizations, and other organizations such as museums, religious organizations, and research and scientific organizations (Guilbault, 2019). Nonprofit organizations use fund accounting to track the amount of money assigned to various purposes and the usage of that money. The focus of fund accounting for nonprofits is accountability. Principles and Methods Used for Fund Accounting: According to Guilbault, just like other forms of accounting, fund accounting has subsequent principles that it follows. These include:  Recording any donations or gifts made to nonbusiness organizations.  Documenting any transactions related to revenues and expenses of nonbusiness entities.  Fund Investment Accounting Principles instruct/require the account to report to the investor(s).  Unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets are used in determining when and where to make investments (2019).

When funding is applied by government agencies, it is their responsibility to maintain control of any of the resources they oversee. Flow accounting tracks the flow of resources in and out of the system and the amount of available remaining resources. Funds received by any nonbusiness entity are allocated to precise areas for specific purposes, facilitating the ability to manage the disbursement of donations, grants, and other contributions. How Government Entities Use Fund Accounting: Government entities utilize fund accounting to facilitate financial management of the resources that are at their disposal. This ensures the tracking and reporting of usage of their funds while guaranteeing compliance with legal requirements, facilitation of performance monitoring, allocating mechanisms for transparency, and facilitating auditing (Elmerraji, 2021). The government’s focus of its funds is on its short-term assets and liabilities, which can be paid for using cash. In layman’s terms, the government does not include anything that cannot be converted into cash to settle short-term liabilities on their balance sheets. Correspondingly, their balance sheet will not include anything that is long-term because current financial resources aren’t used to settle those liabilities. Separating these funds demonstrates their ability to comply with legal mandates and how responsible they are with their financials (Watkins, 2023). How Nonprofit Entities Use Fund Accounting: A nonprofit’s focus is the ability to account for where all grants, donations, endowments, contracts, and any other financial resources are distributed in order to maintain their tax-exempt status for local, state, and federal governments (Herzlinger & Sherman, 2022). Fund accounting becomes indispensable in ensuring compliance with any applicable legal requirements, monitoring performance levels, securing transparency in funds’ use, and promoting an auditing

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obligations framework (Guilbault, 2019). This corroborates that their restricted donations are being used appropriately, allowing transparency and trust with their donors. One requirement is that nonprofits must clarify net assets into two groups: net assets with donor restrictions and net assets without donor restrictions (Herzlinger & Sherman, 2022). Describe One Rule for Each of the Following: Government Entities: Facilitation of financial management obligations related to specific laws and regulations meant to use public funds. Budgeting financial reporting, and procurement rules must be recognized at any moment (Jeter & Chaney, 2022). Nonprofit Entities: They are mandated to ensure the funds at their disposal are used to attain the directed purposes. They are expected to adhere to all legal and donor requirements when utilizing these funds and they cannot be used for personal benefit (Guilbault, 2019). Partnerships: Partners are held accountable for any debts or obligations affiliated with the outfit. All partners are accountable for the situations of the organization. Debts must be met by the partners, who are without exception, liable regardless of the extent of their ownership. Explain Three Main Differences Between Government Entities, Nonprofit Entities, and Partnerships: Government entities, Nonprofits, and Partnerships operate at different levels and have unrelated missions indicating numerous differences between them. The first difference is the

main purpose that they have. The government is mandated to oversee the provisions of public goods and ensure the reinforcement of laws and regulations (Watkins, 2023). Nonprofit organizations serve certain identified social and charitable purposes including disaster relief, healthcare, religious teachings, etc. (Elmerraji, 2021). Partnerships are supposed to undertake the business for profit generation (Vitasek, 2022). The second difference is based on the control and ownership of each entity. For example, government entities are controlled and owned by the public who elect and delegate each role to the appointed representative (Watkins, 2022). Nonprofit organizations have a board of trustees and directors who oversee all the operations of the entity (Jeter & Chaney, 2022). Partnerships are both owned and controlled by all partners of the organization, who have invested in the activities being pursued (Jeter & Chaney, 2022). Lastly, each entity is based on different liabilities. When associating with government entities they are always in correlation with limited liability. This means they are unable to be held liable in most situations (Hayes, 2023). Nonprofits also are associated with limited liability, however, there are situations in which they can be held responsible. On the other hand, partnerships are associated with unlimited liability because they are able to be personally responsible for matters, thus they are expected to pay obligations and debts on behalf of the entity (Hayes, 2023).

References Elmerraji, J. (2021, July 27). Navigating government and nonprofit financials . Investopedia. https://www.investopedia.com/articles/basics/07/government_nonprofit_statements.asp#:~: text=Fund%20accounting%20essentially%20groups%20financial,to%20complete%20a %20specific%20task. Guilbault, M. (2021, February 6). The basics of fund accounting: Key Concepts for nonprofits . LinkedIn. https://www.linkedin.com/pulse/basics-fund-accounting-key-concepts- nonprofits-melea-guilbault/ Hayes, A. (2023, March 28). Liability: Definition, types, example, and assets vs. liabilities . Investopedia. https://www.investopedia.com/terms/l/liability.asp Herzlinger, R., & Sherman, D. (2014, August 1). Advantages of fund accounting in “nonprofits.” Harvard Business Review. https://hbr.org/1980/07/advantages-of-fund-accounting-in- nonprofits Indeed Editorial Team. (2021, October 1). What is fund accounting? (with importance and how it works). https://in.indeed.com/career-advice/career-development/what-is-fund-accounting Vitasek, K. (2022, December 1). Data shows business partnerships are a good idea . Forbes. https://www.forbes.com/sites/katevitasek/2022/11/30/partnerships-three-data-backed- reasons-two-heads-are-better-than-one/?sh=58a759071dfe Watkins, C. (2023, July 3). 4 reasons why government agencies need fund accounting software . The ENGAGE Blog. https://blog.blackbaud.com/4-reasons-why-government-agencies- need-fund-accounting-software/

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