In not-for-profit financial reporting, fund accounting primarily serves to support what purpose?

• A. It reduces administrative complexity.
• B. It helps to minimize donor reporting.
• C. Fund accounting can provide a good mechanism for facilitating reporting to donors.
• D. It replaces the need for external audits.

Answer: (C)

Fund accounting focuses on accountability to donors by tracking resources by fund, especially to reflect donor-imposed restrictions. By segregating assets, liabilities, and net assets into separate funds, each with its own activity and balance, the organization can show exactly how restricted contributions were used and what remains available for future use. This structure directly supports donor reporting, providing transparency about how funds were applied and ensuring compliance with donor intents. The other impact statements aren’t as accurate: fund accounting typically increases, not reduces, administrative complexity; it is designed to facilitate, not minimize, donor reporting; and it does not replace external audits, which still provide independent assurance of financial statements and compliance.