Understanding Fund Accounting

Fund accounting is a method used by non-profit organisations (NPOs) in Malaysia to manage and account for funds received under specific conditions or restrictions. These funds are often provided by donors, grant agencies, the Malaysian government, or other organisations that specify how the grants should be utilised.

Due to the non-profit nature of these entities, the financial reporting guidelines and obligations for NPOs in Malaysia are unique. The primary goal is to track and verify the proper use of the organisation’s resources. Typically, NPOs receive two types of funds: unrestricted funds, which can be used freely, and restricted funds, which are allocated for specific purposes as determined by the donor. Fund accounting helps segregate and trace these funds, ensuring compliance with donor-imposed conditions.

The key objectives of fund accounting include:

• Ensuring accountability for general-use and special-use funds.
• Facilitating traceability to meet donor and regulatory requirements.
• Monitoring financial health and maintaining accurate financial records.
• Justifying expenditures for grants and purpose-specific projects, such as capital improvements or operational expenses.

In Malaysia, NPOs and government entities use fund accounting to document resources obtained for specific purposes. These funds are categorised as restricted or unrestricted. While NPOs adopt standard financial protocols similar to for-profit organisations, their terminologies are adapted. For instance, they use:

• A payment and receipt account to record cash flow.
• A revenue and expenses account to reflect resource utilisation, which reports an excess when revenues exceed expenses and a deficit otherwise.
• A balance sheet for representing the organisation’s financial position, replacing the profit and loss account used by for-profit entities.

For example, a Malaysian non-profit organisation, such as a charity or school, might receive funds designated for specific purposes, such as facility repairs, food programmes, or general operations. Fund accounting ensures that each donation is used according to its intended purpose, promoting financial transparency and accountability.