Government establishments are made to provide essential services to the public and nonprofit organizations. One of the tools used to achieve this is fund accounting. This self-balancing account helps ensure that funds for a specific purpose are traced to such purposes and are efficiently utilized.
Fund accounting defined
According to the institute of chartered accountants (ICAN) public sector accounting study pack, fund accounting is “a separate fiscal and accounting entity in which resources are held, governed by special regulations, separated from other funds and established for specific purposes.”
More so, it can be defined as a government accounting method used to record government financial events in a specific fund and it reveals the inflow and uses of finances of the fund.
Fund accounting is a separate entity that is different from ministries, departments, and agencies. A government agency may hold one or more funds it manages. For example, the central bank of Nigeria manages several development funds.
Each of these funds has a separate accounting system. Where it records income, expenses, and expenditures. Therefore, it may use the cash or accrual basis of government accounting.
More so, a separate financial report may be prepared and presented for each fund. Some funds are sponsored by international organizations, such as the United Nations International Children’s Emergency Fund (UNICEF).
Fund accounting principles ensure stewardship on the part of the MDAs that manage them. That means the provider of the fund wants to know how the money was spent. And if it was used for the right purpose.
Profit or loss is not the main objective of fund accounting. But to provide essential services and infrastructure to the country and its communities. Some may be to provide mosquito nets to rural areas. Or building roads to connect several villages and towns or to support people with particular health challenges.
Fund accounting examples
The following are examples of fund accounting you should know
- Contingency fund
- Consolidated revenue fund
- Petroleum Technology Development Fund (PTDF),
- Trust and Agency Fund and
- Pension Trust Fund.
Advantages of fund accounting
- It is used for stewardship purposes
- Several aspects of governance can be separated and measured
- It is used to manage and grow each section of the economy
- Accountability and transparency in the use of each fund can be monitored.
- The fund is used to provide social goods to the citizens of the country
- Some funds favor the poorer community and can be used to improve the living standards of villagers.
Disadvantages of Fund accounting
- The fund can be siphoned by corrupt leaders
- Focusing on essential services instead of profit will not motivate people to work
- Operating several funds accounting systems is expensive
- It may result in duplication of tasks. As one civil servant may have to repeat the same task on different funds.