How Fund Accounting Differs from Traditional Business Accounting

Imagine you're a CFO transitioning from corporate finance to managing a private equity fund. You're accustomed to standard ledgers and consolidated financials, but now you're faced with capital calls, investor allocations, and multi-entity consolidations. Suddenly, your traditional business accounting systems fall short, leading to delays, audit challenges, and dissatisfied limited partners (LPs). 

What Is Fund Accounting? How It Supports Investment Firms 

Definition and purpose: built for transparency, not just operational control 

Fund accounting is a specialized method designed for transparency and accountability over profitability. Unlike traditional business accounting, which focuses on company-wide profits, fund accounting separates assets into individual funds, each with its own set of records. This method provides investor clarity, accurate compliance reporting, and a clear audit trail—key components of fund accounting best practices. 

Who uses fund accounting? PE firms, family offices, investment managers 

Fund accounting private equity teams, hedge funds, family offices, and asset managers all rely on fund accounting. These entities handle multiple funds with specific investor agreements and regulatory needs. Fund accounting makes it possible to manage and report on each one independently, following principles like GAAP for investment funds. 

Objectives: NAV precision, LP visibility, capital allocation, and audit readiness 

The primary goals of fund accounting include: 

• Net Asset Value (NAV) precision: Calculating fund value with accuracy. 

• LP visibility: Offering clear, investor-specific reports. 

• Capital allocation: Tracking distributions and contributions per LP. 

• Audit readiness: Maintaining detailed, auditable records. 

Traditional Business Accounting: Strengths and Limitations 

Focused on operational profitability, not investor reporting 

Traditional business accounting prioritizes revenue, expenses, and bottom-line profit. While this is useful for operational management, it doesn’t provide insights into investor positions or fund performance. 

Simplified entity structure with single-entity general ledgers 

Most businesses have a straightforward structure—one company, one ledger. This makes reporting efficient but isn’t designed for multi-entity accounting, common in fund structures. 

Lacks investment-specific tracking like capital calls, distributions, or carry 

Capital calls, distributions, and carried interest are fundamental in fund management. Traditional systems can't support these details, making accounting for alternative investments challenging. 

Not built to support third-party fund administrator workflows or LP audits 

Many firms use fund administrators to manage investor activity. Without support for shadow books and fund reconciliation, traditional systems can’t handle the audit rigor needed by private investment firm financial reporting standards. 

Key Differences Between Fund Accounting and Business Accounting 

Capital Flow and Ownership Tracking 

Fund accounting tracks capital at the investor level—recording each contribution and ownership change. This visibility is crucial for private equity firms. In contrast, differences in fund and corporate accounting mean that business systems simply track revenues and expenses, not investor-specific flows. 

Reporting Objectives and Standards 

Fund reporting includes NAV statements, GAAP-compliant financials, and LP allocations. These are essential under GAAP for investment funds. Traditional accounting produces P&Ls, balance sheets, and cash flow statements, focused on internal performance metrics. 

Entity Complexity and Consolidation 

Funds often span 5 to 50+ entities, including feeder funds, SPVs, and co-investments. Managing this requires multi-entity accounting tools that support detailed consolidation. Cartesian supports these workflows with structured processes. 

Performance Metrics and KPIs

Fund metrics include IRR, MOIC, DPI, and RVPI, which reflect fund growth and investor returns. Traditional KPIs like EBITDA and gross margin focus on operational success, not investor outcomes. Fund firms must use systems aligned with private equity accounting services to deliver the right data.

Real-World Example: Where Traditional Accounting Falls Short

A private equity firm using ERP software designed for traditional finance struggles to track capital calls and carry. Without fund-specific modules, they manually input transactions, increasing risk. Auditors uncover discrepancies in NAV and LP reports, exposing gaps in

their system. It shows how fund accounting vs traditional accounting systems serve very different needs.

Frequently Asked Questions (FAQs) About Fund Accounting vs Traditional Business Accounting

1. What is the main difference between fund accounting and traditional business accounting?

A: Fund accounting tracks money by investor and fund, while business accounting tracks money by company and profit.

2. Why can't private equity firms use traditional accounting systems?

A: Traditional systems don't support key fund tasks like capital calls, LP allocations, or complex consolidations.

3. What does NAV mean in fund accounting?

NAV stands for Net Asset Value. It's the total value of a fund’s assets minus its liabilities.

4. Who uses fund accounting?

A: Private equity firms, hedge funds, family offices, and asset managers all use fund accounting.

5. What reports are included in fund accounting?

A: Reports include LP statements, NAV schedules, GAAP financials, and capital account summaries.

6. Can QuickBooks or standard ERPs handle fund accounting?

A: No, they lack support for investor tracking, multiple entities, and audit-level transparency.

7. What is a capital call?

A: A capital call is when a fund asks investors to send part of their pledged money for use in an investment.

8. How does fund accounting support audits?

A: It provides clear records of each LP’s activity, valuations, and transactions—making audits easier and faster.

9. What performance metrics are used in fund accounting?

A: Key metrics include IRR (Internal Rate of Return), MOIC, DPI, RVPI, and capital deployed.

10. What's the role of a fund administrator in this process?

A: They help manage investor transactions, accounting, and reporting—but many firms still need shadow books to ensure accuracy.

11. What’s the difference between an LP and a GP?

A: LPs (Limited Partners) are investors. GPs (General Partners) manage the fund and make investment decisions.

12. Why is entity consolidation so complex in funds?

A: Funds often have dozens of entities (SPVs, feeders, co-invests), each needing to be tracked and reported together.

13. How does fund accounting improve investor trust?

A: It offers detailed, timely, and accurate reports—so LPs know exactly where their money goes and how it performs.

14. Do regulators require fund accounting?

A: Yes, many regulators and LPs demand GAAP-compliant reporting, audit trails, and accurate investor disclosures.

Cartesian’s Solutions for Fund Accounting Challenges

Shadow books and audit-aligned books & records

Cartesian uses shadow books and fund reconciliation to independently verify fund admin reports. This ensures financial integrity and builds LP trust.