Funds that are set aside for a particular purpose should be considered as claims against the assets of the organisation. As such they should be reported as either liabilities or equity. The generally accepted practice is to show them as equity in the form of “Reserves”, especially if there are any undisbursed amounts held for these funds at the end of a reporting period.
As an example, a church may have a Building Fund, an Overseas Missions Fund, and a Local Missions fund. This will require the creation of three “equity” accounts in the balance sheet chart of accounts named, say, Building Fund Reserve, Overseas Missions Fund Reserve, and Local Missions Fund Reserve. These equity accounts in the Balance Sheet are needed to show the total value of the funds at the end of the reporting period.
To show the inward and outward movements to and from these funds P&L
income accounts would also need to be created for each fund in the chart of accounts for the inward movements (receipts) and expense accounts created for outward movements (expenditure). For example: for the Building fund it would be “Building Fund Income” and Building Fund Expenditure". These P&L accounts would be used in Receipt and Payment transactions.
At the end of the reporting period the nett movement in the P&L, for each fund, would then be journalled to update the relative equity reserve accounts in the Balance Sheet.
Let’s say that for the Building fund for January the income was 50,000 and expenditure was $20,000. This represents an increase in the fund and the journal would be:
Debit: Retained earnings $30,000
Credit: Building Fund Reserve $30,000
If there was a decrease in the fund the journal would be:
Debit: Building Fund Reserve
Credit: Retained Earnings