Investments carried at cost
Bookkeepers unfamiliar with fund accounting default to cost-basis accounting because that's what they know from operating businesses — then everything has to be restated once an ASC 946 audit begins.
Emerging Managers
ASC 946, explained for the manager raising their first fund.
No jargon dump — just what investment company accounting actually requires, why it exists, and how to be ready for your first audit instead of scrambling for it.
What ASC 946 actually is
One rule changes everything: your fund carries investments at fair value, not cost.
ASC 946, Financial Services — Investment Companies, is the accounting standard that governs how funds — as opposed to regular operating businesses — report their financial statements. The single biggest consequence for a first-time manager: your fund doesn't carry its investments at what it paid for them. It carries them at fair value, re-measured every reporting period, with the change in value flowing through the statement of operations as unrealized gain or loss.
That one requirement cascades into everything else: a Schedule of Investments that discloses each position and its fair value level, a statement of changes in net assets that tracks capital activity and performance together, and — for anything not quoted on an active market — a fair value memo under ASC 820 that explains your methodology well enough for a skeptical auditor to follow it.
None of this is exotic once you've done it a few times. But for a manager raising fund one, it's usually the first time they've had to think about accounting as anything other than "did the bank balance go up or down."
What a first-time GP needs to have in place
- A fund-specific chart of accounts (not a repurposed operating-company one)
- A documented fair value policy and leveling methodology
- A capital call & distribution process tied to the LPA
- Management fee & expense allocation tracking from day one
- A financial statement template that matches ASC 946 presentation requirements
Where first-time managers stumble
The mistakes that turn a first audit into a bad experience
None of these are unusual — they're just what happens when accounting isn't set up as a fund from the start.
No fair value support
A number gets entered as the "fair value" with no memo behind it. When the auditor asks how it was determined, there's nothing to hand over — and that becomes a finding, not just a question.
Capital accounts that don't reconcile
Side letters, different fee arrangements across LPs, and manual spreadsheet tracking cause individual capital accounts to drift from what the fund-level trial balance actually shows.
Waiting until year-end to think about any of this
ASC 946 compliance is not a year-end cleanup task. Trying to reconstruct twelve months of fair value support and capital activity in the six weeks before an audit deadline is exactly how first audits go over budget and over time.
How I help
Making your first fund audit-ready, not just "done"
I work with first-time managers to build the ASC 946 infrastructure correctly from the start — chart of accounts, fair value policy, capital account tracking, and monthly close — so that when your auditor shows up, the answer to every question is already on file.
Beyond the basics
Questions emerging managers ask before their first audit
Do I need an audit for a small first fund?
Many institutional LPs require an annual audit as a condition of investing, regardless of fund size. Even when it's not strictly required, an audited track record materially helps when raising fund II.
Can I use QuickBooks or Xero for fund accounting?
Yes, with the right chart of accounts and disciplined monthly close process. The tool matters less than whether the underlying structure maps correctly to ASC 946 presentation.
What if my prior bookkeeper wasn't fund-experienced?
This is common and fixable. It usually means a cleanup project to reclassify prior entries onto a proper fund chart of accounts and rebuild fair value support before the next audit cycle.
How early should I bring in a fund accountant?
Ideally before your first capital call. Setting up the chart of accounts and fair value policy before activity starts is far cheaper than reconstructing it retroactively.
Raising your first fund? Let's get the accounting right early.
A short consultation is enough to map out what your fund needs and what it doesn't — no over-scoped engagement, just what's right for fund one.
Schedule a ConsultationContinue reading: ASC 946 basics for emerging managers, setting up your first fund's accounting, or see engagement levels.