Fund accounting enables the ability to allocate, or earmark, dollars for a certain purpose. The problem with the methodology is that it creates a “use it or lose it” type of environment, and does not allow decision-makers to nimbly re-allocate when needed. Spenders if the dollars are motivated to spend all budgeted dollars, whether needed or not, because the nature of the accounting methodology is that these dollars will not be available if they are not spent in the defined period. This method provides incentive for wasteful spending, and does not provide fund managers a reason to save money.
2 Likes
I completely agree. This type of accounting lends itself to the mindset and behavior of use it or lose it. We should treat every dollar spent the same as a for profit company where every budget and dollar is scrutinized. They should also do zero base budgeting each year as well where they have to explain every budget item and expected expense in detail.