What is fund accounting and why your church needs it
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In this lesson we will take a look at what are funds, and why you need them.
If you have three minutes, check out the video for today’s lesson below:
Prefer the skim-able crash course? Keep reading…
What are Funds?
A fund is an area or purpose within your organization that needs to be tracked separately in the accounting from anything else. This can include, but is not limited to:
- Designated funds
- Departments, such as a Missions
- Campaigns, such as a Building fund
When trying to think of what a fund might be for your organization, 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 pretty common problem in churches when people want to be able to give to ensure a specific project is accomplished, such as new choir robes, a playground, or a small renovation. If dollars are set aside in too many buckets, you may find that you have 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 and encourage people to give towards your General fund as much as possible and only do restricted funds when absolutely necessary.
Why do you need funds?
For example, 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 so you can tell how much of it you have spent, confirm that all those expenses were actually for the designated cause, and can see how much is available to spend in the fund. It is almost like you have set up separate checking accounts for each fund, without the hassle of going to the bank and making separate deposits.
Pro tip: Some business accounting software will mask funds as classes or categories to track income and expense, but beware… it’s very difficult to find out how much money is remaining in your fund (the fund balance).
Exercise for today: What do you have money set aside for?