Introduction to Easy Church Accounting
Church accounting can be easy when the organization knows how it works before diving deep into the set up of any accounting system.
This four part series will cover the following:
- Explanation of Funds, Chart of Account (COA), and double entry accounting. An analogy using a family instead of funds. (Read on for Part One)
- How tagging transactions with funds helps reporting and ensures compliance with government regulations. (Part Two)
- Applying funds (tagging) and COAs to a church example using funds. An explanation of different required financial statements. (Part Three)
- Tip and tricks on how you can make it easier for your organization to record transactions and accomplish the daily accounting work using a fund accounting system. (Part Four)
Explanation of Funds, COA and Double Entry Accounting.
Funds VS Chart Of Accounts
Funds are different than individual accounts on the Chart of Accounts (COA).
A Fund is a sum of money available for a particular purpose – a simplified definition. Think of a fund as the pot (sum) of money that finances the ministry and always carries a balance from year to year. A fund isn’t just the checkbook. It includes any accounts from the COA that it uses to conduct its business – assets, revenue, liabilities, and expenses. The fund tells the church the net worth of each ministry; separate of other ministries. It can combine with other funds to show how well the entire organization is financially.
COA is a list of accounts used by an organization and has various types of accounts – Assets, Liability, Revenue, and Expenses. In non-profits the COA activity directly affects the fund either by “increasing the sum” when revenue is received or “decreasing the sum” when expenses are incurred. These accounts track the various activity within the organization – essentially the incoming and outgoing money for each account. Additionally, it is not limited to just revenues and expenses that affect a funds balance as is the case with fund transfers. There are certain individual COAs that go to zero each fiscal year like revenues and expenses. However, other accounts like assets and liabilities carry a balance forward each year. Additionally, a liability account will show what the fund owes money to — like a bank loan. And an asset will show what the fund owns – like a checkbook, building, certificates of deposits, etc.
Double Entry Accounting
Double entry accounting happens when there are at least two entries for one transaction. For example, you would not only subtract money from the checkbook for a vacation, but record it under an expense, like travel. Why is this done? Several reasons actually – it records the the source of the money (checkbook) and the destination (travel expense) which provides a check and balance system. Additionally, the transactions can sort quickly to see all the transactions under the travel expense and how much each was with a grand total at the bottom.
Family Analogy to Explain Fund Accounting
To Better Understand how funds work, let’s start with a family analogy. Let’s use the following numbers for this family analogy.
- the family’s checkbook has $1,500.00 total on Jan 1st, 2013 ($750.00 for Dad and $750.00 for Mom).
- dad goes on his fishing trip and it cost $350.00.
- mom goes to the movies and it cost $20.00.
- dad goes to the movies with the kids and it cost $45.00.
- mom goes and sees her aunt in CA which cost $425.00.
Mom and dad share a checkbook at the bank but they do have different assets, liabilities, revenue, and expenses each month that incur as seen above. Additionally, when income or expenses are coming in and out of one checking account, there are some questions that get very complicated.
Some questions that may come up.
- How do you know what dad spent on his recent fishing trip? Or
- How much did mom spend when she went to CA to visit her aunt? Or
- How much did each spend on the movies? Or
- What did the entire family spend on movies? Or
- How much did dad and mom spend, each? And also together?
Because many users understand the for-profit accounting scenarios, let’s show how the accounting transactions happen in the business world (a ‘for profit’ setting) using a checking account and some expenses. In this setting you would not know who spent the money — only that it was spent on trips and movies and see those deductions in the checking account.
In the following table, we will use expense accounts called “5001 trips” and “5002 movies” and our checking account. The example will show how much was spent on trips or movies. What you don’t know is who took trips or went to the movies and many other questions from above. All you know is they have several entries in the trips and movies expenses and that all of them show up in the checking account. Using the numbers from the family analogy and double entry accounting, it would look like the table below using a ‘for profit’ setting which doesn’t assign ownership to each transaction.
|Checking:||Expenses (5001 Trips):||Expenses (5002 Movies)|
|Bal (01/01/2013) – $1,500.00||Bal (01/01/2013) – $0.00||Bal (01/01/2013) – $0.00|
|Trip to Lodge – $350.00||Trip to Lodge – $350.00||Movies – $20.00|
|Movies – $20.00||Trip to Coast – $425.00||Movies – $45.00|
|Trip to Coast – $425.00||Spent Total – $775.00||Spent Total – $65.00|
|Movies – $45.00|
|$1,500 – trips – movies = $660||$0.00 + $350 + $425 = $775||$0.00 + $20 + $45 = $65|
|Ending Balance – $660||Spent Total – $775||Spent Total – $65|
Questions Left Unanswered When Fund Accounting is Not Used.
Using these ‘for-profit’ accounting records for the movie ‘Expenses (5002 Movies)’ or the ‘Expenses (5001 Trips)’ column, how can you know who spent the money? You can’t. All you know is that there are two transactions for the movies’ account that equal $65.00 and two transactions for the trip’s account that equal $775.00. If you went by the descriptions alone the trip to the CA may be mistaken as the fishing trip for dad, but it was actually mom’s trip to see her aunt in CA. See how confusing and time consuming it is trying to determine who spent what, when an ambiguous description is used or a ‘for profit’ system retrofitted for the non-profit sector? It forces you to read each description hoping it will tell you enough to show the ownership of transaction, however that is not guarantee 🙂 .
A Better Way is The Fund Accounting Model
This is where double entry accounting, COA, and the Funds work together to provide answers to these questions. What would happen if while you are recording the transaction, you tag it with a designation like ‘the dad fund’ or ‘the mom fund’ – to show ownership? The purpose of ‘the dad fund’ is to pay for anything he incurs and the same is true for the mom using the ‘the mom fund’.
For example, the fishing trip would be recorded as subtracting from the checking account, adding it to the fishing trip expense as above, but also tagging both disbursements using the designation ‘the dad fund’ (DF for short). In the same way you record the movie night for mom to the checking account, adding it to the movie expense, and also tagging both disbursements with the designation ‘the mom fund’ (MF for short). In part, two we’ll explore the same example but tag the transactions with either ‘the mom fund’ (MF) or ‘the dad fund’ (DF). The questions above will be much easier to answer.
Stay tuned for the next installment of this four part series.