What’s endowment accounting?

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Endowment accounting is the process of tracking, categorizing, and recording financial transactions involving donor-restricted investment funds of a nonprofit organization. It generally uses the same standards and processes as ordinary financial accounting, but applies it to assets that have specific restrictions that affect how they are managed and book-keeping. The most important task in endowment accounting is to ensure that donor-restricted funds continue to be used in accordance with the donor’s expressed wishes, no matter how much time has passed since the gift was made.

Certain types of nonprofit organizations accept donations that are restricted by the donor for a specific purpose. Most jurisdictions that recognize the special status of nonprofit organizations also legally allow donors to specify how a gift to the organization should be used. If a nonprofit organization violates the agreement to use a donation in a specific way, the donor can demand the return of the gift.

Colleges, universities, cultural institutions, and religious organizations place certain donor-restricted gifts in an account called an endowment fund. Common types of endowment funds are scholarship funds, academic professorships, construction funds, and general investment funds. Some gifts allow the institution to use the capital in a certain way until the fund is depleted, such as a scholarship fund. Other types of endowment funds do not allow the institution to spend the capital. Instead, the institution may invest the donations and use the interest for operating expenses or any other permitted purpose.

The fact that each gift may come with a restriction that the institution must track means that endowment accounting must incorporate special procedures to ensure funds are used properly. Generally recognized accounting standards require institutions to separate endowment funds into permanently restricted assets and temporarily restricted assets. Permanently restricted assets are gifts that do not allow principal to be spent. Temporarily restricted assets have a time limit on the restriction or allow the institution to deplete capital at some point.

Another uniqueness of endowment accounting comes from the fact that many nonprofit organizations are exempt from government taxes. The process of monitoring patrimonial assets in an accounting system must corroborate the use of assets and income for the purposes permitted by the tax code of the jurisdiction. Misuse of endowment funds can jeopardize an institution’s nonprofit status, while failing to properly manage an endowment accounting system can result in legal and fiscal liability.

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