Even though similar to other nonprofit organizations, churches have some very unique accounting needs. It’s important to have a basic understanding of how a church operates along with some basic accounting knowledge in order to set up and maintain an efficient accounting system for your church.
Churches have to abide by tax codes just like other nonprofits and for-profit businesses. Most churches fall under the 501(c)(3) tax code. This means that most churches must follow nonprofit accounting standards and are exempt from federal income tax.
Here, we will cover the definition of church accounting, how church accounting is different from other organization’s finances, best practices, and what to look for in a church accounting software solution.
What is church accounting?
Church accounting is the planning, organization, and recording of the financial transactions that take place within the church. Unlike for-profit businesses, churches don’t exist to make a profit. Instead, they focus on activities that support the congregation and members of the society. For this reason, their approach to accounting is a little different.
What accounting method do churches use?
Since church accounting revolves around stewardship and accountability instead of profitability, churches use an accounting system known as fund accounting. To help churches remain focused on their accountability to their supporters and congregation, fund accounting separates sources of revenue into different buckets based on designations, needs, uses, and allocation of the church.
What are the different sources of revenue for churches?
Churches rely on different sources of revenue to support their mission(s). This support comes from the community and the congregation through the following:
- Capital campaigns
Since these streams of revenue are dependent upon the congregation and supporters of the church, they can sometimes come with restrictions, meaning that certain money must be spent on a designated project or activity requested by the donor. That’s where the buckets come into play. These restrictions become the buckets that the money is separated into.
Any revenue generated by the church, always goes back into the church or is reinvested to further promote the church’s mission. Even with this slightly different approach to accounting, churches are still required to follow the generally accepted accounting principles (GAAP) and comply with all requirements established by the IRS.
How is a church’s nonprofit accounting system different from a for-profit business?
The church has different objectives from a for-profit business. Churches rely on contributions as a way to support their goal of benefiting their congregation and community, and any revenue generated, goes back into the church to further the cause.
For-profits, on the other hand, sell services or goods in order to maximize profits to benefit the owners of the company. Since the two have different objectives, it only makes sense that they have different bookkeeping practices. The bookkeeping method that worked for one would not coincide with the financial practices of the other. These differences are evident especially in the financial statements.
1. Accountability vs. profitability
Those nonprofits focusing on accountability have different goals than those organizations that focus on profit. Since churches rely heavily on the support of their donors, it’s important that the church maintains the trust of their supporters. Their supporters need to know that their donations are being used appropriately or as requested in order to maintain this stream of revenue. For-profits are only accountable to the regulations that govern their business and are out to make as much money as they can to subsidize the owners’ income.
2. Multiple ledgers vs. general ledger
When a for-profit business makes a sale of a good or a service, the revenue is added to a single general ledger and the ledger keeps track of all of the company’s financial transactions and balances itself. Churches use a series of small ledgers which are designated based on restrictions, budgets, and allocations to track the ways the income is used. These ledgers are ultimately organized into an extensive chart of accounts.
3. Statement of financial position vs. balance sheet
The for-profit accounting system’s balance sheets are equivalent to nonprofit organizations’ statements of financial position. The balance sheet shows the for-profit’s assets, liabilities, and equity. The statement of financial position shows the nonprofit’s liabilities, assets, and net assets. Since churches aren’t owned by anyone, there is no equity shared among stakeholders.
4. Statement of functional expenses
The statement of functional expenses is a statement that nonprofits use to help them understand their expenses. The functional expense statement provides church members with inside information about how they use money for their organization’s success. This helps churches see how their funding is being used to further its mission. Understanding the church’s expenses will help to realistically allocate future resources.
5. Statement of activities vs. income statement
To reflect revenue earned during a specific period of time, a for-profit accounting system uses an income statement and church accounting uses a statement of activities. The statement of activities reflect the revenue, expenses, and net changes in assets of the church during a specific period. It shows how much money the church brought in and how the money was used for activities to fulfill and further its mission.
Church accounting best practices
There are some useful tips that will make managing the church accounting system a little easier.
1. Stay current on GAAP and IRS requirements
Financial professionals should have a good grasp of the generally accepted accounting principles and the requirements of the IRS. Both of these cover what is required of church organizations when it comes to the church accounting system and the tax rules. These regulations can change throughout the years so it’s important to stay current on all annual guidelines.
2. Delegate financial responsibilities
No matter what the organization is, and, yes, even with churches, there should always be some internal controls and safety measurements in place to prevent fraud. If financial responsibilities are assigned to multiple people, then there’s an invisible sense of accountability between employees.
3. Create an annual budget
It’s important to have a yearly budget for the ministry, regardless of the size of the church. An operating budget should be created at the beginning of each year. This budget is not written in stone and can change throughout the year as needed. An annual budget is an essential roadmap that keeps the church on track in meeting goals and in ensuring the financial health of the church.
4. Plan for the future
Be sure to establish a financial plan that extends years into the future so that if you need to raise a certain amount of money in the meantime by crafting a fundraising plan or need to hire additional employees, you don’t miss out on the opportunity to do so. Creating a multi-year plan ensures financial stability for the church.
What should you look for in church accounting software?
Church accounting software can significantly simplify the bookkeeping process for churches. The church accounting software solution you choose must evolve around the fund accounting system.
Other than being user-friendly, the following are some things to look for in your church accounting software:
- Fund accounting reporting tools. Be sure that the software provides you with the templates for the unique reports used by churches such as statement of financial position, statement of functional expenses, and statement of activities.
- Budgeting tools. Be sure to have tools that will save your budget from year-to-year and that can compare numbers to make projections for the future.
- Grant management tools. Be sure your software allows you to allocate grant funds appropriately.
- Contributions. Make sure the software can handle tithing, contributions, and fundraising events.
Frequently asked questions
There are many accounting software solutions that can handle fund accounting. QuickBooks is the most popular and well known among the bookkeeping software solutions for church accounting. They offer several bookkeeping software versions which does include specific accounting needs for church accounting.
Church accounting involves recording expenses, tracking congregation contributions, and monitoring spending on the different projects and activities. The focus is not on profitability, but on activities that support the congregation and members of the society. For this reason, their approach to accounting is through accountability.
Many churches use cash accounting since income and expenses are recorded when received and paid.
Accountability and transparency are the key words when it comes to church bookkeeping. The goal here is to be able to show those who are contributing to the church that the money is going where it was designated to go. This is important because the church’s revenue is mostly generated by tithing, contributions, and donations. If those who contributed became unhappy as to how the money was being handled, then this would put future contributions in jeopardy.
Caryl Ramsey has years of experience assisting in different aspects of bookkeeping, taxes, and customer service. She uses a variety of accounting software for setting up client information, reconciling accounts, coding expenses, running financial reports, and preparing tax returns. She is also experienced in setting up corporations with the State Corporation Commission and the IRS.
You might also like:
- Bookkeeping for Startups: Best Practices, Steps, FAQs
- Bookkeeping for Franchises: Best Practices and FAQs
Shoeboxed is a receipt scanning service with receipt management software that supports multiple methods for receipt capture: send, scan, upload, forward, and more!
You can stuff your receipts into one of our Magic Envelopes (prepaid postage within the US). Use our receipt tracker + receipt scanner app (iPhone, iPad and Android) to snap a picture while on the go. Auto-import receipts from Gmail. Or forward a receipt to your designated Shoeboxed email address.
Turn your receipts into data and deductibles with our expense reports that include IRS-accepted receipt images.
Join over 1 million businesses scanning & organizing receipts, creating expense reports and more—with Shoeboxed.
Try Shoeboxed today!