This post was last updated on October 4th, 2022 at 02:29 pm.

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.

Important: This is the last post in a four-part series. If you missed it, make sure to read the first post, The “You don’t have to be a CPA to learn Fund Accounting” Series: Part 1 before moving on to the following scenario!

Keep in mind that in accounting, as in life, there is sometimes more than one way to get the result you want! We will first present the scenario and then illustrate several different ways in which the transaction could be handled. We will also give pros and cons to each method presented.

Fund Accounting Scenario:

During the month of March, the church received total cash donations of $6,000. Of this total, there were no donor restrictions on $3,000 of the money received. A long-time church member gave $1,000 to be spent on a stained glass window for the church. The remaining $2,000 was given by a number of members and designated to update the video, sound, and technology systems used during worship.

The church has not previously received donations for either a stained glass window or for a technology systems upgrade, but they agreed to accept these donations.  The church currently has one checking account that consists entirely of unrestricted general funds and one savings account that consists entirely of restricted building funds.

Solution #1:

The church could set up separate Donation funds called “General Offerings”, “Stained Glass Window”, and “Technology Systems Upgrade” in the donation module.

They could also set up three Accounting funds called “General Fund”, “Stained Glass Window Fund”, and “Technology Upgrade Fund” in the accounting module. The “General Fund” would be designated as Unrestricted and the “Stained Glass Window” and “Technology Update” would be designated as Temporarily Restricted. They would also set up a general ledger revenue account called “Donation Revenue” in the chart of accounts.

They could use the accounting link feature in the donations module and link all of these donation funds to the “Donation Revenue” general ledger account. All of the money would be deposited into the existing checking account.

The linking mechanism creates the following accounting entries for this transaction:

	Debit	Credit	Fund Assignment
Cash – Checking	$3,000		General Fund
Donations Revenue		$3,000	General Fund
Cash – Checking	$1,000		Stained Glass Window Fund
Donations Revenue		$1,000	Stained Glass Window Fund
Cash – Checking	$2,000		Technology Upgrade Fund
Donations Revenue		$2,000	Technology Upgrade Fund

Pros:

• Donations are only entered once because of the linking between the donation and the accounting modules.
• Any donations made to the different donation funds listed, will be detailed on the donation statement given to the donor at the end of year.
• The $6,000 is correctly reported on the financial statement as revenue.
• The cash and revenue are properly allocated between unrestricted (General Fund) and temporarily restricted funds (Stained Glass Window and Technology Upgrade funds).
• The church can keep track of what money came in and how the money was spent for each fund by running a Statement of Financial Position (Balance Sheet) and a Statement of Activities (Income Statement) per accounting fund.
• Linking different donation and accounting funds to one general ledger account streamlines the chart of accounts and does not make financial statements unnecessarily cumbersome.
• The church can create different accounting funds while still maintaining just one checkbook.

Cons:

• None

Solution #2:

The church could set up the separate Donation funds as outlined above. They could also decide to open two additional checking accounts – one for the Stained Glass Window money and one for the Technology Upgrade money. They could then set up separate general ledger revenue accounts called “Donations Revenue” for the general offerings, “Stained Glass Window Revenue” for the stained glass window donations, and “Technology Upgrades Revenue” for the technology upgrades donations.

They could also set up an Accounting fund called “General Fund” in the accounting module. This “General Fund” would be designated as an Unrestricted Net Asset. They would assign all of the revenue accounts to the General Fund. When money is spent for the stained glass window, it is paid out of the separate checkbook and a separate expense account is added to the chart of accounts called “Stained Glass Window Repairs” expense. They do not use the linking mechanism because it would be more difficult with more than one checkbook available.

The church would need to make the following manual accounting entries for these transactions:

	Debit	Credit	Fund Assignment
Cash – Checking #1	$3,000		General Fund
Donations Revenue		$3,000	General Fund
Cash – Checking #2	$1,000		General Fund
Stained Glass Window Revenue		$1,000	General Fund
Cash – Checking #3	$2,000		General Fund
Technology Upgrade Revenue		$2,000	General Fund

 

Pros:

• Any donations made to the different donation funds listed, will be detailed on the donation statement given to the donor at the end of year.
• The $6,000 is correctly reported on the financial statement as revenue.

Cons:

• The church has added valuable time and money to limited resources by adding two additional checking accounts. These checking accounts need to be maintained, check stock ordered, and the bank statements reconciled.
• The church is not able to produce financial statements by fund.
• The church is not properly reporting their Net Asset (equity) section of their Statement of Financial Position (Balance Sheet). Accounting guidelines require that Net Assets be presented as unrestricted, temporarily restricted, or permanently restricted. With this solution, they are showing everything as unrestricted.

Solution #3:

Same Solution as #2 above, except that the church sets up two new general ledger liability accounts for the stained glass window donations and for the technology upgrade donations. These general ledger accounts are “Stained Glass Window Payable” and “Technology Upgrade Payable”. When money is spent for the stained glass window, it is paid out of the separate checkbook and it is recorded as a debit to the liability account.

The church would need to make the following manual accounting entries for these transactions:

	Debit	Credit	Fund Assignment
Cash – Checking #1	$3,000		General Fund
Donations Revenue		$3,000	General Fund
Cash – Checking #2	$1,000		General Fund
Stained Glass Window Liability		$1,000	General Fund
Cash – Checking #3	$2,000		General Fund
Technology Upgrade Liability		$2,000	General Fund

Pros:

• Any donations made to the different donation funds listed will be detailed on the donation statement given to the donor at the end of year.

Cons:

• The church has added valuable time and money to limited resources by adding two additional checking accounts. These checking accounts need to be maintained, check stock ordered, and the bank statements reconciled.
• The church is not able to produce financial statements by fund.
• The church is not properly reporting their Net Asset (equity) section of their Statement of Financial Position (Balance Sheet). Accounting guidelines require that Net Assets be presented as unrestricted, temporarily restricted, or permanently restricted. With this solution, they are showing everything as unrestricted.
• The church is not properly reporting the stained glass window or the technology upgrade donations. These amounts should be recorded as revenue and not as liabilities.

As our examples in this series illustrate, there are often many ways to get to the seemingly same end result.

At first glance, it appeared the solutions would all yield the same results, but after further study, not all of them produced the exact same results. Even those that did yield the same results had pros and cons for each. Time should be spent looking at how your accounting system is structured and asking yourself the following questions:

• • • Am I in compliance with accounting standards?
    • Am I making the most efficient use of our time, talent, and resources or can software help me streamline some of our current processes?
    • Am I producing financial statements and reports that are meaningful to users (e.g. pastor, board of directors, finance committee, church members)?

If you are using a good church accounting software package and organizing it correctly, you should be able to answer “yes” to all of the above questions.

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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.