Fund Accounting Overview

Municipal utilities, and not-for-profit organizations in general, often use a form of accounting different from that used by for-profit corporations. Municipal utilities typically practice fund accounting, whereas corporations practice corporate accounting.

Regulations or other restrictions may require a municipal utility to account for the finances of each of its departments as a separate entity. If a municipal utility provides both water and wastewater service, a municipal utility may need to track the receivables, revenue, and liabilities for water service separately from those of wastewater. In contrast, a corporation is free to co-mingle the moneys of the two services.

To track the services separately, the municipal utility 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 utility 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.