Regulations or other restrictions may require some organizations to account for the finances of each of its departments as a separate entity.
To track the finances of departments separately, the organization sets up a fund for each department. A fund is an accounting entity with its own self-balancing set of accounts. Each fund has its own "sub general ledger" with its own chart of accounts, and within each fund, its debits equal its credits at all times. This allows the organization to report on the financial state of each fund independently.
In addition to having a fund for each department, there is also a general fund, which is used to handle inter-fund transfers as well as shared accounts.
A single obligation may have debt related to different funds. For example, tax liability and penalty and interest may go to the same "revenue" fund, and a collection fee may go to a "collection" fund.
In fund accounting, debits and credits must balance for the whole general ledger and debits and credits within each fund must balance.
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