Guide to Fund Accounting for Educational Institutions

guide to fund accounting for educational institutions

Accounting is complex for any educational institution. From child care centers to prestigious universities, the accounting process requires close attention to detail and dedication to students. At MIP Fund Accounting®, our accounting software for educational institutions enhances the financial management experience.

What Is Fund Accounting and When Is It Used?

Nonprofit organizations use a system of accounting known as fund accounting to track the amount of money assigned to various purposes and the usage of that money. Since nonprofits are not trying to generate a profit, the focus of fund accounting for nonprofits is accountability. Anyone running a nonprofit or educational institution must have enough information to make informed decisions about the best use of limited resources and have ways to report to third parties about how those resources are being used and preserved.

Some nonprofits may use several funds, with each requiring a separate balance sheet and set of accounts. Separating funds this way allows users to determine whether the money has been used for the intended purpose. For instance, a local government may have separate funds for schools, police, street repairs, and sewage treatment.

Fund accounting restricts the use of specific funds. By only using the money for its intended purpose, an organization can maintain better control and more accurately compare the expenditures to the operational results. Fund accounting also allows your supporters to evaluate how well your organization is meeting its goals and helps ensure you avoid triggering a deficit.

What Is the Difference Between Fund Accounting and Regular Accounting?

The difference between fund accounting and regular accounting is that fund accounting is mainly used for nonprofit and government organizations, while regular accounting is used in for-profit organizations. Instead of liabilities and assets, fund accounting uses fund balances. Fund accounting can be more complex than regular accounting, which makes finding the right fund accounting solution crucial for educational institutions and nonprofits.

What Is the Purpose of Fund Accounting?

Many entities use fund accounting, such as charities, hospitals, governments, churches, artistic foundations, and colleges. With fund accounting, your school can demonstrate compliance and accountability. For example, an organization could have governmental funds, proprietary funds, and fiduciary funds. The following funds may fall under the governmental fund category:

On the other hand, fiduciary funds are used for reporting assets held for the organization’s benefit. The following funds are included in the category of fiduciary funds:

Our wide range of solutions can help your institution ensure trustworthy fund governance and connect with students. Features of our fund accounting software include:

With MIP®, you can make school fund accounting easier for your administrators. You can allocate funds, support students’ needs, and create budgets with our single software solution.

Chapter 1: The Benefits of Fund Accounting for Educational Institutions

Fund accounting can serve various purposes and offer several benefits to nonprofits and organizations in the education sector. Nonprofit organizations are under pressure to ensure that their financial status is well understood, and fund accounting can help.

What Is Different About Fund Accounting?

Private nonprofits are becoming increasingly dependent on financial markets for funds. As such, nonprofits need to maintain satisfactory bond ratings and credit to get capital funds. However, this can be difficult, as capital markets can view many nonprofit organizations as risky.

Nonprofit organizations are under pressure to ensure managers, board members, and taxpayers understand their financial status. While adopting financial statement reporting and business accounting procedures could tackle the challenges that nonprofits face, choosing fund accounting is generally a better option. The benefits of fund accounting in educational institutions and other nonprofits include the following:

Our school fund accounting software is an accounting solution designed specifically for nonprofits like educational institutions.

When Should You Use Fund Accounting?

Fund accounting is used daily in nonprofit organizations. Managing funds from different sources can quickly become complex and overwhelming. For example, if you apply for a grant that offers $7,000 to be spent on certain expenditures, and you receive this money via a check that you deposit into a checking account with a balance of $5,000, you would have to make a few considerations.

You will need to determine how you will record the receipt of the $7,000 grant, how you will record the expenses you use the grant money to cover, and whether you will know how much money remains in the account at any given time.

You can easily address these concerns with fund accounting, as your system will ensure the fund has its own asset, expense, liability, income, and equity balances. This system will make each fund a separate entity, and you can easily view simple information for your entire organization or each individual fund.

What Are the Benefits of Fund Accounting Software?

While for-profit businesses use financial reporting to determine profitability, nonprofits use financial reporting to ensure assets support the organization’s mission and goals. Educational institutions, in particular, can enjoy several advantages by using fund accounting software. Benefits of fund accounting software include:

At MIP Fund Accounting®, we understand that managing your organization’s funding is essential for transparency, accountability, and success.

What Is the Rationale for Fund Accounting?

Fund accounting exists to help trustees meet their legal obligations to use every fund according to the guidelines. Nonprofits rely on nonrevenue sources for funds like donated services, endowment income, and gifts, all of which could have constraints for use.

Trustees have a legal obligation to secure funds and keep them available for certain purposes, even after the funds are spent. For example, if an educational institution receives a gift for construction, proceeds from the construction’s eventual sale may not be available for general purposes. Additionally, they may need to give a portion of the sale’s proceeds to the donor.

While businesses often rely on retained earnings or debt alone, nonprofits’ capital expenditures also receive funds through capital fund drives or appropriations. The organization’s administrator treats managing the capital budget as a different financial planning responsibility. The organization also maintains the capital budget as a special fund.

Nonreciprocal sources of revenue like gifts require creating an entity that organizations manage separately. For instance, if a graduating college class raises $15,000 to establish a scholarship, the restricted balance sheet would include:

When the school awards a $5,000 scholarship to a student, this amount becomes tuition revenue, and the school records it as a transfer to an unrestricted fund. They then update the restricted balance sheet to:

In this case, the scholarship fund has given this money to the student, who then pays it to the college. Fund accounting gives the college control over the amount available in the account and the assets it can use for a specific purpose.

Chapter 2: How to Choose the Right Accounting Software

Previously, bookkeeping was a paper-based process that involved a ledger and countless columns to record the essential financial data of an organization. However, in the digital age, every organization can benefit from fund accounting software regardless of size. With accounting software, you can reduce human error and gain insights into your organization that you wouldn’t be able to with a paper version.

What Is Fund Accounting Software for Educational Institutions?

Fund accounting software for schools and universities integrates student records with an accounting system. By consolidating students records into a single, centralized database, you can improve efficiency, minimize confusion, and avoid duplicates in data entry. Accounting software for educational institutions can also track funds intended for school-specific considerations and procedures like textbook tracking, retention rates, student fee registration and processing, and educational forecasting and budgeting.

At MIP®, our fund accounting software for educational institutions enhances your financial management and offers various solutions that ensure trustworthy fund governance.

How to Choose the Right Accounting Software for Your Organization

Any organization can benefit from utilizing the proper accounting software. You can gain insights into your organization, generate forecasts, rate services, and find previously overlooked items. Finding the right accounting software for your organization can be challenging. To choose the right software, you should consider your software options and identify your organization’s accounting needs.

Consider Your Accounting Software Options for Schools and Colleges

You should identify what accounting software options may be a good fit for your organization. For example, if you run a small primary school, your best options will differ from those of a large university.

Free accounting software options are also available, though many of these programs do not offer the features and functions that nonprofit organizations need. While free software or the free version of paid software may have some useful features, free accounting software doesn’t cater to the needs of nonprofits.

The option that works best for your organization depends on your specific needs and goals, so weigh the pros and cons of each option available to you.

Determine Your Organization’s Accounting Needs

To choose the right accounting software for your organization, you need to understand your accounting needs. Assess both your financial and managerial needs, along with your projections for the future. Good planning can help your organization avoid needing to change software too quickly.

Your budget will also impact whether an option is right for you. For example, if your organization is small with a limited budget, you may opt for a lower-end solution. Note that lower-end does not mean lower quality — rather, you are opting for a solution that doesn’t support as many functions as a more robust system. These accounting systems typically cannot handle significant monetary figures and cannot consolidate checks for several invoices. Depending on budget and size, this trade-off may be worth it for the lower cost.

You can use many accounting software options temporarily for free via a demo or trial. Try out the different software options you are considering to determine which may be the right one for your organization.

Choose Your Preferred Deployment Option

Another aspect of selecting the right accounting software for your organization is choosing your preferred deployment option.

Remember that cloud-based systems tend to require subscription licenses, while on-premise software is usually available under a perpetual license. Ultimately, your choice depends on your organization’s needs and budget.

Best Accounting Software for Educational Institutions

By consolidating records into a single centralized database, you can minimize confusion, improve efficiency, avoid duplicates in data entry and save time. Look for the following features in accounting software for educational institutions:

Self-balancing fund ledgers tend to be most appropriate for nonprofit educational organizations, so you should prioritize those in your search. To evaluate education accounting software, consider the following:

The school fund accounting software from MIP® can offer your educational institution the features and functions you need. If your college or university requires a simple option for improving fundraising efforts, we can provide you with the most effective solution.

Chapter 3: Do You Have a Weak Fund Accounting System?

Everyone involved in a nonprofit organization must perform their duties reliably, securely, and efficiently, particularly when it comes to financial transactions. Internal control can ensure all the processes meet your organization’s expectations, which means identifying any internal control weaknesses like a weak fund accounting system.

Weakness in a fund accounting system could mean the effectiveness or implementation of the internal controls has failed. If your organization has a weak fund accounting system, your organization could be at risk, even with strong security measures in place.

What Is System Weakness?

A system weakness refers to a deficiency in your organization’s accounting system. System weakness could lead to a higher risk of transactions being incorrectly reported and recorded. As a result, you could face a more expensive audit, as auditors will be more likely to expand audit procedures to accurately assess whether financial statements fairly represent your organization’s financial results, cash flows, and position.

Weaknesses in an accounting system can include technical control weaknesses, administrative control weaknesses, operational control weaknesses, and architectural control weaknesses.

To avoid the negative impact of having a weak fund accounting system, you need to know how to identify a weak system.

How to Identify Weakness in an Accounting System

Weakness in your accounting system could spell trouble for your nonprofit organization. As a result, you should understand how to recognize a weak system. Follow the steps below to identify weaknesses in your accounting system:

If you’ve identified that your fund accounting system is weak, you can implement a new system that will work for your nonprofit organization.

Implementing a Fund Accounting System

Fund accounting gives a code to every transaction. Assigning these codes helps your organization track expenses and revenue and meet your goals. To enjoy these benefits, you will need to implement a true fund accounting software solution for nonprofits. Here are the steps involved in implementing a fund accounting system:

  1. Set up net assets with no donor restrictions: Your first step is to set up the unrestricted fund, also known as the operating fund or general fund. This fund refers to your net assets without donor restrictions and is key to your organization’s financial mission.
  2. Set up net assets with donor restrictions: Next, set up the restricted funds, including donations with restrictions. You should use these assets as the donor intended, though you may be able to use earned revenue for carrying out ongoing activities.
  3. Shape your ideal solution with MIP®: With MIP Fund Accounting®, you can customize your fund accounting system to meet your school’s specific needs. Choose the core modules and features you want to include and add modules as your institution grows, allowing you to track and report the financial information that is the most important for your organization, your supporters, and your board. With our software, you can keep sensitive data secure and compliant with federal regulations.
  4. Request a demo: When you’re ready to try our fund accounting solution, request a demo to see MIP® in action. We will reach out soon to schedule a product tour for you.

Once you’re ready to implement a fund accounting system into your educational institution, contact us at MIP Fund Accounting®.

Chapter 4: Educational Industry Fund Accounting Best Practices

You can support your nonprofit and propel your organization forward by maintaining a strong reserve ratio. To ensure your organization’s success, you need to be certain that you track your reserve fund activities properly and spend your restricted funds and operating reserve appropriately. You’ll also want to organize your transactions and documentation involving restricted funds in preparation for an audit. To help your organization’s fund accounting succeed, you should understand the basic principles and best practices.

Basic Principles of Fund Accounting

Basic principles of fund accounting exist to ensure the proper documentation of revenues and expenses. These basic principles will guide your educational institution in your accounting practices. The basic principles of fund accounting include:

Follow these basic principles of fund accounting to keep your nonprofit organization successful.

Fund Accounting Principles for Nonprofit Organizations

The specific fund accounting principles vary by institution type. Government organizations, for example, have different fund accounting principles than educational institutions. In general, fund accounting principles for nonprofit organizations include:

Fund Accounting Best Practices

Nonprofit organizations receive unreciprocated or unconditional asset transfers or funds from another entity. These funds are transferred either directly or via an intermediary so the organization can perform a humanitarian mission and benefit the community or environment they serve. To uphold the organization’s integrity and assure the donors, a nonprofit should implement a fund accounting system and best practices to ensure the system’s success. Sticking to fund accounting best practices will allow your institution to:

Follow these fund accounting best practices to meet these responsibilities:

1. Get Your Team on the Same Page

To run a nonprofit organization successfully, you need your entire team to be on the same page. By keeping each person in the loop, you can ensure that everyone has a clear understanding of how to track your various funds and how they can be used.

Fixing ongoing errors after they occur can be costly and painful. For example, if your bookkeeper does not understand how to track the expenses or income for the funds, you may struggle to undo the damage later. To get your team on the same page, follow the steps below:

2. Utilize Class Tracking Functionality

Nonprofit organizations with several restricted funds or operating reserve funds should use the fund accounting method for reporting purposes. By using the class tracking functionality, you can ensure funds are used properly per any restrictions, capture expenses and revenues relating to specific funds, and eliminate the disorganized bookkeeping that can occur when the right controls and processes are not in place.

Class tracking functionality can help you stay accountable and streamline reporting obligations. You can generate profit and loss statements and organize them by class for board members and funders, making it easier to review the expenses and revenues for specific funds.

3. Review Your Fund Transactions Each Month

One of the aspects of effectively managing reserve funds involves ensuring balances are sufficient for achieving a fund’s purpose. When you review your nonprofit organization’s transactions each month, you can:

If someone makes an allocation error, catching it early will help your team correct it and prevent mistakes from happening in the future.

4. Establish Separate Investment and Bank Accounts

By setting up separate accounts that your nonprofit can use for regular banking, you can easily track expenses and interest income related to specific funds. Using separate investment and bank accounts provides many benefits:

5. Use a Single Central Document for a Funds Summary

You can use a single central document to summarize all of your nonprofit organization’s funds. Creating a document to summarize your funds can help keep the reporting requirements and restrictions for separate funds clear to staff and management. However, instead of depending solely on documentation to guide your organization’s spending, you may want to make sure everyone understands the fund restrictions at a transactional level. This single central document can allow your nonprofit organization to maintain consistency in preparing and recording your financial reports.

MIP® provides fund accounting software that is perfect for nonprofits and educational institutions.

Request a Demo for School Fund Accounting Software

At MIP Fund Accounting®, we can meet your fund accounting needs of today, tomorrow, and the future. Our industry-leading fund accounting solution can provide comprehensive financial oversight and help your educational institution achieve its goals. Nonprofits raise more than $1 billion each year using our software solution and other software from Community Brands. Our fund accounting software includes:

MIP® is a fund accounting system built specifically for nonprofit organizations and government entities to support the complexity of financial management inherent to their structure. We offer organizations an adjustable chart of accounts designed to record and report on various funding sources. When you equip your educational institution with a fund accounting solution, you can better engage donors, improve financial decision-making, and operate more efficiently.

Don’t have a strong fund accounting system in place yet? If you’re looking for school activity fund accounting software, request a demo today to see MIP® in action. When you’re ready to discuss our solution with a team of experts, get in touch.