Question 2 

Is fund accounting less appropriate for businesses than for not-for-profits?

A newly formed not‐for‐profit advocacy organization, the Center for Participatory Democracy, requests your advice on setting up its financial accounting and reporting system. Meeting with the director, you learn the following: 

• Member dues can be expected to account for approximately 80 percent of the organization’s revenues. 

• The organization plans to seek grants from private foundations to carry out research projects pertaining to various political causes. 

• The center has already received a gift of $100,000. The donor specified that the funds are to be placed in investment‐grade securities and that only the income is to be used to support center activities. 

• The center leases office space but owns its furniture, fixtures, and office equipment. 

• The center has taken out a five‐year term loan of $100,000. Although the loan is not due until its term expires, the organization intends to set aside $17,740 each year with the prospect that, properly invested, these payments will provide the necessary $100,000.

1. Do you believe that the center should establish its accounting system on a fund basis? If so, why?

2. Assume you answered “yes” to question 1. What specific fund types do you think the center should set up? Explain.

3. Alternatively, suppose the center was a privately owned, profit‐oriented consulting firm that provided political advice to its clients. The firm would charge its clients a fixed fee each month in return for which they would receive periodic newsletters and the opportunity to meet with the firm’s partners. In addition, the firm expects to enter into contracts to carry out specific research projects for its clients.

Would you now recommend that the firm establish its accounting system on a fund basis (assuming, of course, that it would prepare its external financial reports in accordance with generally accepted accounting principles applicable to businesses)? Explain.