Your church is just that, a church. It’s not a business, and therefore it has special financial needs that for-profit businesses don’t have. Churches need to track their finances by funds, such as a missions fund or building fund. Funds allow the church to allocate tithes and offerings properly, and track how much money is available in a particular fund at any given time. This is where fund accounting for churches comes into play.
What Are Funds?
A fund is an area or purpose within your organization that needs to be tracked separately in your accounting system. This can include, but is not limited to:
- Designated funds
- Departments, such as Missions or Youth
- Campaigns, such as for a building
When trying to think of what a fund might be for your church, ask yourself, “Do I need to know how much money I have set aside for _____?” This is the key question.
Pro tip: Beware of having too many funds. This is a common problem in churches when people want to give to a specific project. Examples include new choir robes, a playground, or a small renovation. If dollars are set aside in too many buckets, you may find less flexibility in how to cover daily operations. Plus, if you don’t raise enough to fully fund the project, those dollars are stuck in that fund going nowhere fast. Talk about what your church wants to accomplish as a whole. Also, encourage people to give toward your general fund as much as possible and to restricted funds only when absolutely necessary.
Why Do You Need Fund Accounting For Churches?
Let’s say you get a designated gift that provides $5,000 to be spent on a your church’s mission fund. This money is deposited into your organization’s checking account that had an existing balance of $3,000.
- How will you report that this $5,000 in income is different than your standard donations?
- How are you going to record the expenses that use this $5,000?
- In a few months, how will you know how much money is left of this $5,000?
- How can you assure the person who gave the gift that those dollars were used for the correct purpose?
You need this money set aside in a fund in your accounting. In a properly set-up fund accounting system, you separate those dollars into their own fund. Then you can tell how much of the fund has been spent and confirm those expenses were used toward their designated purpose. Plus, you can see how much is available to spend in the fund. It’s like having separate checking accounts for each fund, without going to the bank and making separate deposits.
If this sounds overwhelming, don’t exert yourself. There are fund accounting courses and degrees for CPAs and bookkeeping professionals. If your church has a dedicated bookkeeper, it may be helpful to have them take a professional course or gain certification.
However, if your church is smaller and the accounting may be one role of many for a single individual, you may benefit from church accounting software. It can make managing your church’s finances a breeze, while following true fund accounting practices.
Fund Accounting Software For Churches
Instead of using business accounting products like QuickBooks®, you will likely benefit from true fund accounting software made specifically for churches. It makes tracking funds easier, and provides church-specific financial reports, such as Balance Sheet by Fund and Income Statement by Fund.
Most business accounting software will mask funds as classes or categories to track income and expenses. However, it’s very difficult to find out how much money remains in each fund. We’ve highlighted all of the major differences in our comparison of QuickBooks® versus fund accounting for churches.
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Unfortunately, we are unable to provide tax advice. We recommend that you contact your CPA for any questions you might have. I’m sorry we couldn’t be of more help.
All the best,