IconCMO Blog

According to the Financial Accounting Standards Board (FASB), non-profit organizations – no matter the size – must produce a Statement of Financial Position. The Statement of Financial Position is a church balance sheet. In the past when viable software solutions were not available, churches would use separate checkbooks to keep the money separate for their ministries. Other creative ways developed over the years, like using spreadsheets or classes to tediously track money and produce reports.

These methods have led to inaccurate reporting, possible misappropriation of funds, slow production of the reports, and reports that were not in compliance. Fund Accounting was developed to help churches manage various funding sources and how money is spent. Fund accounting simplifies the process by having one checkbook, which is separated into multiple funds with individual balances.

To help clarify fund accounting, let’s pretend the checkbook is a pizza pie:

Each fund’s balance, or net amount, is a slice of the pizza pie. To simplify this example, we will not have any liabilities. If we apply numbers, the entire pizza pie is worth 1,000.00.  (Yes, we realize that is an outrageous price for a pizza pie.)

The Youth Fund’s slice is:	400.00
The General Fund’s slice is:	500.00
The Mission Fund’s slice is:	100.00
Total	1000.00

The total still equals 1,000.00, but each fund has their respective slice of the pizza pie representing the net worth. The General Fund owns the majority and the Mission Fund owns the smallest slice. This does not mean either fund is more important than the other, only that one fund owns more than the other. In fact, a common church process that is often out of compliance is taking in all money through the General Fund and then distributing it to other funds. This suggests a hierarchical structure where the General Fund oversees the other funds.

Now let’s look at some transactions and see why fund accounting looks different from the accounting methods used in the For Profit industry. The For Profit method is shown first and the Fund Accounting method second.

The organization receives a Telephone Utility invoice for 150.00:

According to the organization accounting procedures, the double entry accounting would state the following:

	Debit	Credit
Checking		150.00
Telephone Expense	150.00

This would not work or be in compliance with FASB because we do not know which Fund (remember funds are the slices of pizza pie) should be reduced to pay this bill, therefore adjusting the overall balance of the checkbook and the net amount of the fund. Fund accounting solves all these issues because you choose which fund should pay for this expense. In this example, the General Fund pays for this monthly bill.

The first part of the transaction mirrors the For Profit method; however, the addition of the Fund category is the key.

	Debit	Credit	Fund
Checking		150.00	150.00 General
Telephone Expense	150.00		150.00 General

Now the new balances for each slice of pie should be the following:

The Youth Fund still owns:	400.00
The General Fund is reduced:	350.00 (500.00 – 150.00 = 350.00)
The Mission Fund still owns:	100.00
Total	850.00

Fund accounting empowers the church by giving it the ability to see financial reports for the whole pizza pie as well as for each slice. A fund accounting system can produce a balance sheet just for the General Fund that would show 350.00 in the checkbook, which is the net amount (worth) of the General Fund. Additionally, a balance sheet for the Youth Fund would only show 400.00. A balance sheet for all funds would show the entire 850.00 in the checkbook, but would not specify how much money is allocated to each fund. This type of report is typically called a consolidated balance sheet.

Advanced Setup:

Generic accounts minimize the Chart of Accounts and simplify reporting (i.e. having one Telephone Expense instead of a Pastor Telephone Expense and a Youth Pastor Telephone Expense). The following example will show a Telephone Bill that is split between the General and Youth Funds. Notice the same generic accounts – Checking and Telephone Expense – are used for both funds.

	Debit	Credit	Fund
Checking		100.00	100.00 General
Telephone Expense	100.00		100.00 General
Checking		50.00	50.00 Youth
Telephone Expense	50.00		50.00 Youth

Now the new balances for each slice of pie should be the following:

The Youth Fund is reduced:	350.00 (400.00 – 50.00 = 350.00)
The General Fund is reduced:	400.00 (500.00 – 100.00 = 400.00)
The Mission Fund still owns:	100.00
Total	850.00

The Balance Sheet for the General Fund would show 400.00 in the checkbook as the net amount (worth). The user should be able to create a report for the Youth Fund and only see 350.00 on the balance sheet as the net amount (worth). If the user ran a balance sheet for all funds, it would still show the entire 850.00.

Icon Systems is the only church management software provider that is certified in the FAS 95 and 117 required by the Financial Accounting Standards Board for the fund accounting standards that all non-profit organizations need to follow. Visit www.iconcmo.com for more information or to register for a free trial.