This quiz will test a person's church accounting knowledge.

Liabilities plus equity will equal assets. This comes down to the balance sheet equation where Liabilities + equity equals assets.

The other options while they are paid out of the church's accounting checkbook, they are not considered expenses. Paying a bank loan lowers the principle of a liability.

To fully understand this question the user must understand the fund accounting principles. They would want to review the What is Fund Accounting article. Simply stated using revenue accounts has too many problems to figure out how much each church function (ie mission) has to spend or has spent.

According to FAS Topic 958 the Statement of Activities is equivalent to the income statement that for profit industries use.

When multiple checkbooks (or worst sub accounts of checkbooks) are used, that means the system can't do proper fund accounting. It can't take the assets account (the checkbook) and break it up into various funds - or equity pieces. Using any type of accounts in the chart of accounts to define the funds is incorrect. They belong in the equity section. To read more, check this article out.

The work around for Quickbooks and funds is to use classes. However, according to Quickbooks own site they say this about classes.

The Balance Sheet by Class report can’t classify some transactions in QuickBooks. Some of those transactions create unclassified amounts on the report.

By not classifying every single transaction's disbursements, your balance sheet will never be right. Some of the transactions that can't be classified are journal entries with unbalanced classes, a payroll liability check, and transfer of funds between two church funds.

As stated in the correct answer, liabilities are what is owed to someone else. Funds and their balances are what the church currently owns - ie money in the bank so to speak. It is not a debt! The chart of accounts has five distinct areas - assets, liabilities, revenue, expenses, and equity. Funds are considered equity accounts according to FASB. These five areas have specific account types that belong within each one. In other words you wouldn't list an expense in the revenue section. Likewise you would list an equity account in the liability area.

The definition of fund accounting that is used in non profits is the following:
"Fund accounting is an accounting system for recording resources whose use has been limited by the donor, grant authority, governing agency, or other individuals or organizations or by law.[1][2] It emphasizes accountability rather than profitability, and is used by Nonprofit organizations and by governments. In this method, a fund consists of a self-balancing set of accounts and each are reported as either unrestricted, temporarily restricted or permanently restricted based on the provider-imposed restrictions."

Donation revenue (or any revenue) accounts are not reported on the balance sheet.

Churches are not exempt from the UBIT (Unrelated Business Income Tax). If they have gross receipts of over $1,000.00 they must file a tax form. This pdf goes over what UBIT and gives some clear examples. As always consult a CPA for your church's unique operation.

There are two main accounting methods called cash accounting and accrual. See Investopedia.

Donation funds and accounting funds are different. You will want to review this article. Donation funds are reported on differently than accounting funds for example. Donation funds start over each year. Accounting funds carry a balance forward each year. This is just one difference.

GAAP stands for Generally Accepted Accounting Principles. See the definition at the CFA Institute. Keep in mind all churches must follow GAAP.

What typically happens is the church does one of two things which would start an IRS audit. They messed up on payroll taxes or they don't report Unrelated Business Income Tax (UBIT). A lot of churches charge rental fees throughout the year and over a certain amount, they must file the right forms to declare that income. In other words not all revenue is tax exempt for churches. Once the IRS sees a mistake they can open the audit which means it can turn into an almost limitless scope. According to the IRS Pub 1828,

the types of required records frequently include organizing documents (charter, constitution, articles of incorporation) and bylaws, minute books, property records, general ledgers, receipts and disbursements journals, payroll records, banking records and invoices. The extent of the records necessary generally varies according to the type, size and complexity of the organization’s activities.

Contributions (donations) is revenue to the church.