There is no money in Revenue and Expense accounts

This post was last updated on March 24th, 2021 at 09:33 am.

That’s right: revenue and expense accounts carry no balance of money. When bookkeepers don’t realize this principle of double entry accounting, it can lead to a lot of problems and frustration.

A good church accounting software uses double entry accounting and complies with FASB standards. IconCMO’s fund accounting software does both.

Double entry accounting is designed to track both your balances (Assets, Liabilities) and the ways money is coming into or leaving an organization (Revenues, Expenditures). Keep that distinction in mind: Assets and liabilities are the accounts that have money in them (that carry a balance), and Revenue and Expense accounts are there to show in what ways money is coming in and leaving.

How does this work with a donation to the church?

A typical donation records the deposit into an asset account (Debit) and records it as revenue (Credit). But remember, although you are recording the revenue in a revenue account, there is no actual money being deposited into that account. The money is going into the checkbook. The revenue account — ‘Sunday Morning Gifts’, ‘New Building Donation’, or whatever it might be — is just there to keep track of how much money is getting into your checking account by a particular means.

I cannot tell you how many times I have heard things like this: “We have 5000 in our revenue account and I still have not spent all of that so we should be able to spend that next year.” The problem is revenues do not have a balance. They do not carry forward from fiscal year to fiscal year. Revenues are not there to tell you how much money you have to spend for something.

Understanding the purposes of different types of accounts helps a church or nonprofit get a clear idea of what’s happening financially in the organization.

Reporting

The finance council should review at least four separate reports and learn how to read these to get an overall understanding of how the church is doing financially.

1. Budget Report
   • Offers an estimate of revenues and expenses that will occur over the next year
   • Shows you whether you’re meeting your estimates
   • Focuses on revenue and expense accounts
   • Has a begin date and an end date
2. Statement of Activities
   • Similar to a profit and loss report
   • Shows how money is coming into and leaving the church
   • Shows the net gain or net loss is over a period of time
   • Focuses on revenue and expense accounts
   • Has a begin date and an end date
3. Statement of Financial Position
   • Shows what you have, i.e. the net worth of the organization and how it is divided
   • Focuses on assets accounts (liquid and fixed) and liabilities
   • Has a single date, like a snapshot of what you have at a certain time
4. Change in Net Assets
   • Shows any changes in the organization’s net assets for any funds
   • Focuses on Net Assets, which are determined by Asset and Liability accounts.
   • Gives the full picture of not just what you have but how that has changed over time
   • Has a begin date and an end date

Why do you need all four? Why not just focus on revenues and expenditures?

Let’s say the church has a big building project. The church will be gaining a lot in Fixed Assets while losing a lot in liquid assets. Most of these changes won’t show up in your revenue and expense accounts, but your assets will be changing a great deal.

Here’s what a church needs to know about its finances. It needs goals for its future finances (Budget Report). It needs to know how money is coming into and leaving the church and whether it’s gaining or losing money over time (Statement of Activities, Change in Net Assets). And the church needs, of course, to know how much money it has (Assets), as well as how much it owes (Liabilities).

If a church council knows all that, the members have a clear understanding of the church’s finances and a good foundation for making decisions.

Please leave your comments below.