Welcome to our guide on church accounting. This guide covers the definition of church accounting, best practices, outsourcing options for bookkeeping, options for accounting software, and more!
Churches vs. Businesses
Churches and businesses vary in why they exist, for obvious reasons. A church’s mission focuses on activities that benefit their congregation and society, and aren’t there to maximize profit. Nobody owns shares of a church or interests in its property. Extra income should be recycled back into the church’s mission and activities.
There are several other differences worth mentioning. Churches are exempt from paying income tax while businesses do pay these taxes. Your church wants to make the world a better place by investing time, resources, and funds into the community, so the government chooses to credit organizations like yours with certain benefits. While churches don’t pay income tax, they do pay property and state taxes.
Another difference is businesses create Income Statements each quarter to assess the business’s financial performance. Churches, however, write up a Statement of Activities. This includes revenues, expenses, and net assets. The other resource a church depends on is a quarterly Balance Sheet listing the equity. Since churches don’t operate with an owner or owners, they’ll produce a Statement of Financial Position, which shows the organization’s liabilities and assets.
Next, we’ll look at how accounting for a church might differ from accounting for a traditional business.
What Is Church Accounting?
A key difference between accounting for for-profit versus churches is the concept of fund accounting. Fund accounting stems from the key difference between churches and businesses. It focuses on accountability and stewardship instead than profitability. For-profit entities have a general ledger (or a single self-balancing account), and churches have multiple general ledgers. These general ledgers go by “funds.” Funds let organizations separate resources into different accounts to identify the uses of those resources as well as where they came from. Since churches are tax-exempt, they have to keep detailed records while bookkeeping.
Fund accounting gets complicated depending on your organization’s needs. FASB117 and FIN46 are the IRS resources that outline the needs for your church’s accounting system.
But what do funds look like? They can include (1) unrestricted, temporarily restricted, and permanently restricted net assets, (2) designated funds, (3) ministries, (4) departments, (5) campaigns, (6) etc.
Ask yourself the question, “Should I know how much money I’ve set aside for _____ ?” Whatever that answer is, you can make a fund for it. Some software programs mask funds as classes or categories; however, these methods will make it difficult to find out how much money you’ve set aside at a given time, despite allowing you to track how much money you’ve received and spent in a class.
Church Accounting Best Practices
Here is a list of best practices for managing your church’s books, which will help demonstrate accountability and protect your finances. In addition, be sure to read up on the IRS’s latest rules and regulations to supplement these best practices.
1. Spread Out Your Financial Duties
Nobody expects to be a victim of fraud. Nine times out of 10, people can trust those in their organization, but you still want to implement safety measures just in case. Start by assigning financial responsibilities to multiple people. This creates a layer of accountability among employees. If you notice someone regularly completing tasks assigned to another employee, and there are discrepancies in the numbers, look into it.
2. Implement A Code Of Ethics
Create internal policies and controls to significantly improve your fraud protection. Implement a code of ethics, which will show those affiliated with your church the values of the organization.
3. Create An Annual Budget
Budgets are essential to all churches, big and small. Create a realistic operating budget at the start of each year. And don’t worry if it needs corrections later on. Your organization’s budget is free to evolve the further into the year you get, so don’t feel like you have to remain rigid with your initial plan. Also, make sure your budget is approved when it’s written up. It’s important for those in charge to be aware of upcoming plans and initiatives, as they may need to approve increases to the budget.
4. Understand GAAP And IRS Requirements
GAAP stands for Generally Accepted Accounting Principles (GAAP), and they are guidelines that all accounting professionals must follow. They cover both for-profit and church tax rules. It’s imperative financial professionals understand the current GAAP rules and any changes that happen throughout the years.
5. Create A Multi-Year Plan
Do you know where your church will be over the next several years? Creating a financial plan that spans multiple years ensures strategic growth. If you want to raise X amount of money within the next five years, it might mean more hiring. Planning ahead of time means garnering early support from your church’s leaders and elder board.
6. Manage Your Fundraising Expectations
Sometimes leaders get caught up in what they could do if they only had more money to help them do it. It’s important you keep yourself grounded during this stage. Realize there are many other churches out there, and all of them believe in their mission.
Create realistic fundraising plans by using past data to set your goals. If this next year involves using new tools or techniques, consider lowering your goal until you’ve tried and tested these new strategies. And remember there’s nothing wrong with adjusting your plan when things go wrong, or even when they go right. Don’t feel shackled by past commitments.
Specialized Services For Church Accounting
Hire Someone New, Or Outsource?
Churches usually have tight budgets, which means fewer staff members. What results is a situation where an employee has to fulfill multiple roles in the church. As a result, bookkeeping might get pushed aside while dealing with other responsibilities.
More and more churches outsource bookkeeping these days. Letting someone else handle bookkeeping, payroll, and other responsibilities can allow staff to focus on the church’s mission.
If your organization needs to hire someone to manage the books, you might want to consider outsourcing instead. Avoiding new hires can cut down on administrative costs, and it’ll reduce the budget dedicated to church accounting software and training.
Professional bookkeepers help churches determine annual expenses. Outsourcing allows churches to budget around consistent expenses since outsourced services are paid at standard intervals. Churches that outsource often experience a reduction in costs compared to staffing a bookkeeper. These cost savings can allow the organization to hire staff in other departments or improve the current staff salaries, which in turn reduces turnover and its associated costs.
Bookkeepers Help With Tax Returns Too!
When it comes to filing with the IRS each year, churches can often have some of the most complicated returns out there. This is due to the rules around reporting revenue and expenses for 501(c)3 organizations. Any money that enters the church needs to reflect on the organization’s tax forms in some way. For example, some people give money every month, and others give once or give in-kind contributions. A church needs to provide statements so people can write off these contributions. Outsourced bookkeeping can help your church handle these tasks, while offering advice on changing tax requirements and codes.
Moving to an outsourced bookkeeping and accounting solution can help churches focus on their mission. The move offers church accounting expertise from tax professionals, and it will reduce expenses and increase revenue.
Software Solutions Specifically Created For Churches
Accounting software handles tithing, other forms of contributions, and fundraising events. The software should also handle administrative work, like incoming and outgoing payments, and budgets. For this reason, you need church accounting software designed to handle fund accounting. Extra benefits in a platform include giving tools and presenting your data concisely to those who have given.
Because there are church accounting software platforms out there for large and small organizations, and everything in between, it’s important you find one best suited to your needs. For example, a small or mid-sized church might not need complicated financial tracking. But they might benefit from an all-in-one management software. This can simplify your inbound cash flow by accepting contributions, ticket sales for events or retreats, or merchandise payments, all from a central membership platform, saving you time when it comes to keeping on top of your accounts.
So educating. Please can I use this material for our students in the seminary? Rev. Dr. Moses I. Bobo. From Nigeria, Africa.
Glad you found it helpful! We have several colleges that use our program to educate students about fund accounting and stewardship. If you do share a portion of our articles, we ask that you attribute Aplos Software as the author and provide a link to the full content on our site if possible.
Do you recommend bonding a bookkeeper?
Bonding a bookkeeper can provide protection in the event of fraud. The requirements for bonding vary by state and insurance companies, so it is always a good idea to research to understand your requirements and consult with an external accountant to evaluate your procedures, controls, and checks and balances for potential risk to see if would be recommended for your organization.