Budgeting is important to most church organizations and is a highly-utilized feature in IconCMO. However, budgets can only be set for revenue and expense accounts, which can pose a problem if you want to budget for a liability account such as a mortgage.
For example, a typical Mortgage Payment of $1,000 looks like this:
- Credit Checkbook (Asset) = 1000.00
- Debit Mortgage Loan (Liability) = 800.00
- Debit Interest (Expense) = 200.00
The entries are in balance and you are able to post the check or journal entry; however, in this scenario you are only able to budget for the $200 interest expense since $800.00 of the payment when towards your mortgage liability account.
Here’s the solution
Go to your Chart of Accounts and create an expense account called Budget Principle, then Create a sub-account underneath it called Budget Offset. Add the corresponding entries when you make a check or create a journal entry to record a mortgage payment.
- Credit Checkbook (Asset) = 1000.00
- Debit Mortgage Loan (Liability) = 800.00
- Debit Interest (Expense) = 200.00
- Debit Budget Principle (Expense) = 800.00
- Credit Budget Offset (Expense) = 800.00
With the two additional entries, you can now budget for your mortgage principle. Budget Offset is a sub-account of Principle Expense, so it will not show on the Statement of Activities report since they offset each other.
I hope you found this helpful. If there’s any other accounting scenarios you’d like to see in future posts, please comment below! 🙂
Verne Johnson says
May 2, 2018 at 5:31 pmI do not get the budge offset account either. My objective in including the principal payment in the budger was to insure that we were asking in general fund offerings the funds needed to make this pa payment.
My idea would be to have the budget principal offset an equity account.k
Josh says
May 3, 2018 at 8:13 amVerne in IconCMO we utilize FASB guidelines double entry fund accounting. We do not allow you to hit the net assets directly. In the example the actual expense is zero because the Budget Account and Offset net to zero. This is just a way to show record in the budget report as the principle amount is lowering a liability.
Thanks,
Alice Walden Kenyon says
August 2, 2016 at 2:07 pmPerhaps it would be helpful to explain how the budget should be set up. Does only the “Budget Principal” expense get “budgeted’ and the “Budget Offset” expense does not? If only one gets budgeted, what is the effect on the Budget Variance report? It seems to me the overall expense variances total would be misleading. If both are budgeted, then it seems they would cancel each other out in the overall budget totals.
Josh says
August 2, 2016 at 3:09 pmAlice,
Thank you for your question. Since the mortgage is in the liabilities you only have an interest expense. The principal is not actually an expense. But since churches want to budget on it and it is a very common question a work-a-round is to create a “Principle Mortgage Expense” with a sub account of “Principle Mortgage Offset Expense”. Each month a Debit would be entered for the principle amount on the main expense account and the offset would be a credit amount for the exact same dollar value. Making the expense net of the two expense accounts always zero. When you do your budget you are only going to budget the Principle Mortgage Expense account and not the offset. This way you can see how much is going to the mortgage each month. Since the principal is predetermined for the year (if the church does not make additional principal payments) then the variance should always be zero.
Alice Walden Kenyon says
August 3, 2016 at 8:05 amJosh
I am trying to understand how the budget should be set up. I think I understand your explanation for how the actual expenses are recorded.
How will the principal / offset be reflected in the budget reports?
Josh says
August 3, 2016 at 10:38 amAlice,
You will need to show the sub-accounts. There are no actual expenses occurring. So a net of zero expenses must be reflected correctly no matter what we do and the should be reflected in the reports as such. For an example on a 1000 dollar budget per month for Budgeted Principle. The Budget comparison actual would list the Budget Principle 1000.00, Budget Offset(Actual) -1000.00, Sub-total net 0.00 expense. This is all correct. Since the mortgage is in the liabilities and is being reduced by the principle amount it helps to view the Statement of Financial Position to clarify the budget reports when reviewing the financials.
Alice Walden Kenyon says
August 3, 2016 at 11:39 amI see how that budget set up would work for the budget variance report. However when I want to prepare a top level budget for the board, I would want my overall totals to be reflective of what the income [cash] requirements are. The purpose [for me anyway] in budgeting expenses is to know what level of income is required.
Let’s say I am a small org and have a mortgage payment and a utility bill that I wish to present a budget for. The mortgage payment principal averages $800 per month and the interest will average $200 per month. In addition I have a utility bill that averages $150 per month.
If I were to set up the budget as I understand you have described it would be as follows:
Interest Expense: $200
Utility Expense: $150
Mortgage Principal Budget: $800
Mortgage Principal Offset: -$800
Total Monthly Budget: $350
Total Annual Budget: $4,200
What I would like to show is an income/cash requirement budget of $1150 per month [$13,800 annually]. The common complaint I encounter is “We made our budgeted income targets. Why are we out of money?” I am not sure how that situation is avoided by using the method you described. It seems like there might be some sort of ‘Other Expense’ that is treated like periodic depreciation or amortization that could be used to pull the outflowing cash to the bottom line… but then I’m not a trained accountant.
Or perhaps I’m missing the boat altogether on this. Thanks for trying to clarify for me.
Josh says
August 4, 2016 at 8:29 amAlice,
You are placing too much emphasis on the Budget report. It is not a complete reflection of the finances. There is not a single report that is going to offer you this. The finance council should review three separate reports and learn how to read these different reports to obtain an overall understanding of the churches net worth.
1) Budget Report – Meant to offer an estimate of expenses that will be incurred over the next year.
2) Statement of Activites – Designed to provide the positive/negative net worth of the church.
3) Statement of Financial Position – Designed to show how the net worth of a church is divided. Liquid/Fixed/Liabilities/ etc.
Why do you need all three? If a large building project is increasing the Fixed Assets and using all the liquid the first two reports will not help you at all. Yet the third report will not help you understand how the finances are trending. Without the budget you won’t have an estimate of your costs coming up. Failure to review at least these three reports will never give you a complete picture of the finances.
Alice Walden Kenyon says
August 4, 2016 at 11:03 amThank you Josh
We do use all the reports.
I just would like to see the budget reports enhanced to better help us with planning for future expenses. I was hoping to find a way to apply your initial suggestion to the planning process.
FYI – I find the new Annual Budget Comparison report to be very helpful.