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 either. Extra income should be recycled back into the church’s mission and activities as well.
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 that 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 owner’s equity. Since churches don’t operate with an owner or owners, they’ll produce a statement of financial positions, 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 those resources’ uses as well as where they came from. Since churches are tax-exempt, they have to keep detailed records while bookkeeping.
But what do funds look like? They can include (1) unrestricted, temporarily restricted, and permanently restricted net assets, (2) designated funds, (3) grants, (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 for a class.
Church Accounting Best Practices
Here is a list of best practices for managing your church’s books, which will 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 ten 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 then discrepancies come about 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 if it needs corrections later on, don’t worry!).
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 its written up. It’s important for those in charge to be aware of upcoming plans and initiatives, as they’ll likely need to approve increases to the budget as well.
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 and creating a marketing plan. Planning ahead of time means garnering early support from your church’s leaders.
6. Manage Your Fundraising Expectations
People often get caught up daydreaming about all the money they’ll raise while they’re planning their fundraising strategy. It’s important you keep yourself grounded during this stage. Realize there are many other churches out there, all vying for the attention of donors, and all of whom believe their mission is the most important.
Set 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 that 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 sitation where an employee has to fulfill numerous 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 often allow people 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 too since outsourced services are paid at standard intervals. Churches that outsource often experience a reduction in costs compared to staffing a bookkeeper as well. 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. Revenue can come from services the organization provides, admission fees via theaters, art exhibits, museums, etc, fundraising or donations, and other areas.
Any money that enters the church needs to reflect on the organization’s tax forms in some way. For example, some donors give money every month and others donate once or give in-kind contributions. A church will need to provide receipts so donors can write off these contributions. Outsourced bookkeeping can help an organization handle these tasks while they offer advice on changing tax requirements and codes.
Moving to an outsourced bookkeeping and accounting solution can help churches focus on their mission. It will offer church accounting expertise from tax professionals, and it will reduce expenses and increase revenue.
Church accounting software handles tithing, other forms of contributions from donors, fundraising events, and they produce reports to make submitting forms like the Form 990 easier. The software should handle administrative work like incoming/outgoing payments, and budgets too. For this reason, you need church accounting software designed to handle fund accounting. Extra benefits in a platform includes donation tools, handling grants, and presenting your data concisely to those who have donated.
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. They might benefit from an all-in-one management software too. This can simplify your inbound cash flow by accepting donations, event ticket payments, store purchases and subscriptions all from a central membership platform, saving you time when it comes to keeping on top of your accounts.