Fund Balance

The accounting term fund balance is usually reserved for government units, including government hospitals, which are typically a proprietary fund of a government entity such as a county or city. It is similar to equity as that term is used by for-profit entities and to net assets as that term is used by not-for-profit organizations. Fund balance, simply stated, is[Page 221] the surplus of assets of a fund over its liabilities. Fund accounting is the process of segregating activities into identifiable units enabling management to better understand what assets have been allocated to the fund, how much has been spent from the fund, and the quantity of unspent funds that remain. Fund balance for general governmental units is divided into two categories: reserved and unreserved.

Reserved fund balances are resources that have been set aside for a specific purpose. They represent a portion of the fund balance that cannot be used for any purpose other than the one for which it was legally intended. An example of a situation requiring the need for reservation of fund balances is a payable or commitment to a third party existing at the balance sheet date that has not yet come to fruition but that the organization knows will materialize in the near future. Another situation requiring reservation of fund balances exists when the asset in question is not available for current appropriation. An example of this situation is when the organization has assets on the books, such as noncurrent receivables, and where the organization expects to receive this money in the future. However, at that point in time, the funds are not readily available to satisfy current liabilities.

Unreserved fund balances are further broken down into two subcategories: designated and undesignated.

Designated, unreserved fund balances are funds that are tentatively earmarked for particular expenditures. These designations may never be legally authorized or needed by the organization. In other words, the funds may never be used for their designated purpose. An example of this situation is money budgeted for unforeseen expenditures relating to a future construction project that are never expended. Designating unreserved funds differs from reserving fund balances because the designation of unreserved funds is not an allocation of funds that is required to be legally authorized by the governmental unit. Reserved fund balances are established to legally reserve a portion of the fund balance. Designating unreserved fund balances is more of a budgeting process conducted by management.

Undesignated, unreserved fund balances are basically the funds left over after the reserves for fund balance and the designation of unreserved fund balances. These funds are not set aside for a specific purpose and are readily available for all other expenditures that might arise.

Fund accounting is not limited to governmental units in that it is also used by not-for-profit organizations. Where governments are required to use fund accounting, not-for-profits are not. According to the Financial Accounting Standards Board in Statement of Financial Accounting Standards No. 117, not-for-profit organizations are not required to use fund accounting, but they are required to categorize their net assets into three distinct classes: unrestricted, temporarily restricted, and permanently restricted.

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