Using Fund Accounting Effectively

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Best Practice

One important objective of external financial reporting is to help users assess accountability by “assisting in determining compliance with finance-related laws, rules, and regulations.”1  To achieve this goal, state and local governments organize and operate their accounting systems on a fund basis.

Accounting and financial reporting are complementary, yet distinct. Accounting is the process of assembling, analyzing, classifying, and recording financial data and necessarily requires that data be maintained a high level of detail. Financial reporting, on the other hand, is the process of providing the information thus assembled, analyzed, classified, and recorded in a practical, summarized form suitable for decision makers.2  The effective use of fund accounting requires that funds be established in a manner suitable for both purposes.

The number of “funds” established within an accounting system to collect and maintain data should be driven by the needs of management. The number of funds reported in external financial reports, on the other hand, should be based on the needs of financial statement users, who typically need and desire less detailed data. Accordingly, separate “funds” within an accounting system often can and should be combined to form a single fund for purposes of general purpose external financial reporting.

Sometimes governments inappropriately combine “funds” in their financial statements that ought not to be combined, thus denying financial statement users valuable information on legal compliance. More commonly, governments report more funds than are truly necessary to achieve the goals of general purpose external financial reporting, thereby needlessly adding to the length and complexity of their financial reports and potentially increasing audit fees.


GFOA recommends that every state or local government that uses fund accounting3  establish clear criteria for determining whether a given “fund” in its accounting system should be treated as a fund for purposes of external financial reporting. The application of these criteria to individual “funds” should be documented and then periodically reviewed to take into account changes in circumstances (for example, a significant decrease in a revenue source reported as a separate special revenue fund). A government’s periodic review of its fund structure ought to specifically consider whether the goals of general purpose external financial reporting could better be achieved by combining similar “funds” in the accounting system into a single fund for financial reporting purposes. For example, it may be possible to combine a number of smaller debt service “funds” or capital projects “funds” into a single debt service fund or a single capital projects fund in the financial report. Likewise, it might be possible to combine individual grant “funds” that are available for similar purposes (e.g., special education) into a single special revenue fund.

Accounting, Auditing, and Financial Reporting

1 Governmental Accounting Standards Board (GASB), Concepts Statement No. 1, Objectives of Financial Reporting, paragraph 32.
2 Governmental Accounting, Auditing, and Financial Reporting, page 2.
3 This guidance is not intended to apply to most governmental units that are accounted for as stand-alone business-type activities.

Approved by GFOA's Executive Board: 
October 2012