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Automatic Nonprofit Fund Balancing

December 4, 2019BY John Kearns

In accounting for nonprofit organizations with multiple Funds, it's imperative that each Fund remain constantly in balance.

In some systems, the user must ensure that each Fund remains in balance by posting inter-fund journal entries.

Business ByDesign for Public Sector keeps Funds in balance automatically by creating the required fund-clearing entries needed when accounting transactions span multiple Funds.

How does it work?

Whenever a transaction is entered that spans multiple Funds, the system automatically creates offsetting entries to fund-clearing accounts to ensure that each of the Funds affected by a multi-fund transaction remains in balance.

Example 1 - Manual Journal Entry

Following is an example of the traditional method:
A journal entry is created that affects more than one Fund:
Account Fund Debit Credit
5000 - Insurance 1000 - General $1000  
1800 - Prepaid Insurance 2000 - Restricted   $1000

This entry would cause Funds 1000 and 2000 to be out of balance by $1000. To correct this, a second journal entry would be required:

Account Fund Debit Credit
3500 - Due To/From other funds 1000 - General   $1000
3500 - Due To/From other funds 2000 - Restricted $1000  

The net effect of these two entries is that Funds 1000 and 2000 will remain in balance because of the equal and opposite postings to each.

The more efficient alternative

The previous scenario required manually creating additional balancing entries.  The alternative is to allow the system to create these entries automatically:

  1. A journal entry is entered manually (identical to the first entry above) where each line of the entry posts to a separate Fund.
  2. Upon posting, the offsetting entries are added to the journal voucher automatically. The resulting posted journal entry appears as follows:
Account Fund Debit Credit Created By
5000 - Insurance 1000 - General $1000   Manual Entry
1800 - Prepaid Insurance 2000 - Restricted   $1000 Manual Entry
3500 - Due To/From other funds 2000 - Restricted $1000   Auto Generated
3500 - Due To/From other funds 1000 - General   $1000 Auto Generated

Example 2 - Accounts Payable Processing

The traditional method

An accounts payable invoice for $1000 is entered to the system with distribution to multiple Funds ($900 to Fund 1000 and $1000 to Fund 2000).  This results in the following entry:

Account Fund Debit Credit
2000 - Accounts Payable 1000 - General   $1000
6000 - Marketing Expense 1000 - General $900  
6000 - Marketing Expense 2000 - Restricted $100  

This results in Funds 1000 and 2000 each being out of balance by $100.  To correct this, a fund-balancing entry of $100 would be required.

The more efficient alternative

SAP Business ByDesign incorporates a reporting principle called "Fund, Profit Center/Segment, Clearing.

This reporting principle creates complete balance sheets by fund, profit center, and segment, with clearing. The receivable and payable items are divided into funds and profit center. If the journal entry does not have a zero balance at the fund and profit center level, additional clearing lines on clearing accounts are created in order to produce a zero balance at the fund and profit center level.

Following this principle, the following entry would be created instead:

Account Fund Debit Credit
2000 - Accounts Payable 1000 - General   $900
2000 - Accounts Payable 2000 - Restricted   $100
6000 - Marketing Expense 1000 - General $900  
6000 - Marketing Expense 2000 - Restricted $100  

The result is that each Fund remains completely in balance as the accounts payable control account posting is split automatically by Fund proportionate to the expense distribution by Fund.

When the payable is later liquidated from a restricted cash account, the following entry is created automatically to show that unrestricted expenses have been paid out of a restricted Fund and that a release will be required:  

Account Fund Debit Credit
2000 - Accounts Payable 1000 - General $900  
2000 - Accounts Payable 2000 - Restricted $100  
1000 - Cash 2000 - General   $1000
3500 - Due to/from Other Funds 2000 - Restricted $900  
3500 - Due to/From Other Funds 1000 - General   $900

Video Walk Through

 

ByDesign NonProfit Fund Balancing

 

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