This post was last updated on October 4th, 2022 at 12:33 pm.
In today’s economy, churches often compete with other charitable organizations for valuable member donations. If members are experiencing financial setbacks, they may have less money allocated toward charitable giving. Churches will want to make sure they have their donation and accounting systems set up correctly so that member donations are accurately recorded and donation statements are presented in a timely manner to donors at the end of the year. If members perceive that the system is inaccurate or in any way a burden, they may decide to take their donations elsewhere. Don’t let this happen to your church! This series will address how churches can structure and organize their donation and accounting funds and systems for maximum effect.
Since churches are largely funded by donations, it is important to take a look at how software systems, such as IconCMO, can be set up regarding donations and financial statement reporting. A good church software system should allow the user to set up donation funds, accounting funds, and general ledger accounts that all link together.
To gain a further understanding, let’s first define some terms:
A donation fund is a fund that is set up within the donation module of the software package. It is used to keep track of donation and report back to the donors how much and into which areas they donated money (e.g. general operations, a particular memorial, the youth fund).
At the end of the year, the donation funds will be listed on the individual member donation statements and will provide a total per fund along with an overall yearly total of donations made. Notice there has been no mention made of what accounting fund or what general ledger account the donation fund should be posted to. That will come later in the series. For now, the donation funds stand alone – except to say that when donations are entered into a software system it would be nice if they didn’t have to be entered twice (i.e. once in a donation module and again in the accounting module). A good church software system will allow the donations entered in the donation module to flow directly into the accounting module; therefore eliminating the need to enter the donations twice.
An accounting fund is a means by which the church can track the sources and uses of cash according to if they are unrestricted, temporarily restricted, or permanently restricted. This is in accordance with generally accepted accounting principles (GAAP).
In 1993, the Financial Accounting Standards Board (FASB) issued Statement 117 Financial Statements of Not-for-Profit Organizations. This statement introduced the idea of assets, liabilities, and net assets.
Net assets is the term given to the equity section of the balance sheet-renamed the Statement of Financial Position.
Net assets are classified based on the presence or absence of donor-imposed restrictions. These classifications are: (1) unrestricted, (2) temporarily restricted, or (3) permanently restricted. Definitions of each are as follows:
Unrestricted Net Assets are net assets that are neither temporarily restricted nor permanently restricted. Therefore, they include all net assets with uses not restricted by donors or by law (i.e. a donor gave money to the church and did not stipulate how the money was to be spent.) The general fund is an example of an unrestricted net asset.
Temporarily Restricted Net Assets are assets whose use is limited by either donor-imposed time or purpose restrictions. Time restrictions require resources to be used within a certain period of time or after a specified date. Purpose restrictions require resources to be used for a specified purpose (i.e. a donor gave money to the church to purchase a new organ: once the organ is purchased, the restriction is released.)
Permanently Restricted Net Assets are those that the donor stipulates must be maintained by the organization in perpetuity. Permanently restricted net assets increase when organizations receive donations for which donor-imposed restrictions limiting the organization’s use of an asset or its economic benefits neither expire with the passage of time nor can be removed by the organization’s meeting of certain requirements (i.e. a donor gave money to the church for the purpose of …).
It should be stressed again that the classification between the three categories of accounting funds is based on the restrictions imposed by the donor and not by the church. Accounting standards require these three classifications of net assets to appear separately in the net asset (equity) section of the Statement of Financial Position (Balance Sheet). This means that if they appear in the liability section of the balance sheet, the financial statement is not in conformity with accounting standards.
The Chart of Accounts
General ledger accounts are used to keep track of the financial transactions of the church by five main categories: assets, liabilities, net assets, revenue, and expenses. Within these categories, there can be many accounts. All of the general ledger accounts together will make up the financial statements. An example of a general ledger account is “Insurance Expense” which keeps track of how much insurance the church pays over the course of a year. A good church software system will allow the user to set up a general ledger account and assign different accounting funds to it.
For example, there can be an “Insurance Expense” account in the unrestricted fund and in the restricted fund. Once this can happen, it is not only possible to prepare a “consolidated” Statement of Financial Position (Balance Sheet) and a “consolidated” Statement of Activities (Income Statement), but it is also possible to prepare a Statement of Financial Position and a Statement of Actives for each accounting fund individually, which is required by accounting standards.
The way churches structure their accounting really starts at what the accounting standards dictate and what the users want to see in the reports. In essence, the church must start at the end – the reports – and work their way backwards to see what will produce the desired result.
Now that we have examined the definitions and taken a look at the standards, we will take a look at some common scenarios for churches and see how they could best record the transaction. Keep in mind that in accounting, as in life, there is sometimes more than one way to get the result you want! For the next three weeks, we will present one scenario each week and illustrate several different ways in which the transaction could be handled. We will also give pros and cons to each method presented.
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This post was written by Karla, an accountant with Icon Systems:
Karla is a CPA licensed in the states of Minnesota and North Dakota and has over 20 years of accounting experience. She has a servant’s heart for working with churches. When not at work, she enjoys gardening, reading, Bible study, and spending time with her friends and family.