This post was last updated on January 18th, 2021 at 09:14 am.
If you were to search for ‘small church accounting software’ in Google, the results most likely will give you many review sites. When this post was written eight out of ten results were review sites – not software providers. Most review sites will steer you down the wrong path.
To make things worse – most sites include software that doesn’t provide accounting, within their own package. But wasn’t that what you searched for – accounting software for a small church? These non-accounting software packages rely on Quickbooks or some other accounting package. Having an additional system increases the software cost for the organization. When an accounting package is added on later, you may as well add another $800.00 to $2,000.00 per year onto your software cost.
Quickbooks on the low end cost $840.00/year, and this package doesn’t even include nonprofit accounting. For the Quickbook nonprofit package, you need the Enterprise nonprofit edition which is $1,155.00/year. Another popular accounting package is Aplos, which is $1,908.00/year.
Software that only includes member and donation management, like Breeze church management may be cheaper, but that’s because accounting is not included. Accounting and payroll is the most time-intensive piece to church management software, by far. This is true when it comes to the development and technical support for accounting. By not having to worry about supporting an accounting program, Breeze and many other companies circumvent the cost and put that cost at the church’s feet to pay, with an inferior accounting package.
Spending Money on Non-compliant Church Software
The organization may already be using Quickbooks. The treasurer or other church leaders may not want to change that component when looking for a new member or donor software. However, what if Quickbooks doesn’t obey FASB fund accounting principles? Is Quickbooks still the best choice, when it’s not compliant with FASB? These FASB principles take into account the GAAP and are recognized by the SEC and AICPA.
NOTE: Abbreviations Table
- FASB => Financial Accounting Standard Board.
- GAAP => General Accepted Accounting Principles.
- SEC => Security Exchange Commission.
- AICPA => American Institute of Certified Public Accountants.
When a church expects their accounting software to follow FASB principles they need to ensure they choose one that actually does it. Quickbooks and other small church accounting software packages don’t follow FASB guidelines. Should the church throw money out the window for non-compliant software? Probably not the best use of the church’s resources.
An analogy may be helpful. Would you ever buy a car that didn’t have seatbelts knowing that you can get a fine for not having seatbelts?
Repercussions of Non-compliant Software for Small Churches
The repercussions of not having compliant software are bad for churches. They risk damaging their reputation, adverse tax implications to their donors, and losing their non-profit status. The IRS can and will impose fines, penalties, and back taxes when the church fails to follow the IRS rules for 501(c)3 organizations. The church can’t follow these rules without a compliant fund accounting system.
A church’s reputation is probably the most important asset they have. Once a reputation is tarnished, the doors could close quickly. For example, if the church is not accounting for the donations correctly and gets audited by the IRS, this will send waves throughout the congregation and the general public. Donations will dry up quickly at the slightest hint that a church is not following the rules.
A nonprofit’s reputation is everything. Donors are getting more and more savvy when looking at where to donate. They examine how much money actually goes to the mission versus what is collected. According to Captrust, about 1/3 of Americans are skeptical that charities are spending their funds properly. Globally, 60% of people are concerned about nonprofits being able to accomplish their missions. Preserving the organization’s reputation is critical when they rely on donors to support their goals and missions.
Tax implications from poor church accounting
Adverse tax implications for donors is also troubling. What happens is if the IRS removes the tax-exempt status from a church, and issues a revocation date? From that date forward donors can’t use any donations as a tax deduction on their taxes. So, not only does the church miss out on their tax exemption benefits, but their mistake trickle down to the donors.
The last major implication is the organization itself is treated as a for-profit business from the revocation date forward. Thus any donations received, would be taxed, like any other for-profit business income. Imagine if the church had to pay 20% – 30% in business taxes from their donations. This would take a big bite out of the church’s resources to complete their missions or even stay open
Churches need to ensure the accounting software they use is FASB (Topic 958) compliant. The IRS also has multiple regulations such as Pub. 1771, Pub. 526, that are required for donation tracking.
Church Accounting isn’t Included with Church Software
What can possibly go wrong?
When the church software does not include accounting, it may not be in the best interest of the church. Many times churches decide to have two systems to track the money — one for the donations and another one for the accounting. Sometimes this decision is made because of church politics. Other times it is well-intentioned but can backfire on the church.
Having two systems means double entering the data. First through the donation software and then into the accounting system. While mistakes can always happen, enter data twice, doubles your chances of these mistakes. Worse yet, when mistakes happen you will have to correct them in one or both systems.
Why having one system works.
Instead of having two systems, a one-system approach seems to be a more reasonable solution. For example, when an incorrect entry is made in a one-system approach, the user corrects it in one place and it flows through the entire system. For example, if we correct a donor’s donation, the software simultaneously corrects the accounting entry.
Having Accounting in One System. No More Headaches.
Regular accounting (for-profit) is not everyone’s cup of tea. Church accounting (non-profit) is even more complex than for-profit accounting because non-profits are required to track money based on donor restrictions. This added complexity requires very specific accounting principles to be applied so accurate records are available.
Why add to the chaos by having two separate systems – one for donations and one for accounting. This would make an already complex environment – worse by doubling the complexity.
Accounting data consistency
Having one system increases consistency which is one of the biggest rules in accounting. Here’s some insider information 🙂 – the IRS likes consistency as well. When data entry is inconsistent in the general ledger it raises eyebrows and red flags. Having the church accounting software in one system helps to keep this consistency by letting the software handle repeating entries, consistently.
Bridging data gaps in reports
Another issue that is resolved with one system is having all the data that you need to build reports across all the data sets. When accounting and donations are in two systems, it is very difficult to get reports that agree with each other, much less have the same look and feel.
An example of this would be online donations. Fees always reduce the online donation, but Donors must be given full credit for their donation. In a separate accounting system, the treasurer needs to make certain the correct entries are being made so the revenue account, expense account, and asset account are all recorded correctly for each donation. An all-in-one system captures these transactions automatically, eliminating the chance of error. This makes reconciling easier and accurate reporting for both donations and accounting.
What happens when the treasurer makes a correction to the accounting system but fails to inform the financial secretary about it so they can handle it on the donation side? Many times treasurers make edits to the general ledger without a second thought on how it affects the donation side.
For example, maybe the treasurer gets a returned check so they make a journal entry to remove the money from the checkbook. Removing the donation from the donor is often overlooked when two systems are used. Thus leaving in place a donation for a donor and their year-end receipt that has an incorrect entry. The IRS doesn’t like it when someone is given credit for something that they didn’t do – ie a returned donation.
Easier end user interface and navigation
Having one system helps with user productivity. By having one system, users learn how to master that one system instead of trying to remember how to work multiple systems. Having one system reduces the learning curve, especially with complex tasks like church accounting.
Summary for Small Church Accounting Software
As we can see having a church accounting system within the main church software package is very beneficial. It removes problematic data entry and corrective issues. Additionally, we know that when doing a Google search, the majority of the results are review sites which, more often, steers users in the wrong direction. We also reviewed why a two system doesn’t work because of the increased cost and complexity. An example is having to purchase an accounting package like Quickbooks ($1,100.00) on top of their church management system.
Lastly, it can not be said enough, that having compliant software is an absolute must. It not only saves the church from losing their tax exemption but also their reputation. Churches and other non-profits must have absolute transparency. When transparency does not happen, people suspect the worst. Churches need to put any rumors to rest, immediately.