This document provides an overview of different accounting methods for churches and Christian ministries: accrual basis, cash basis, and modified cash basis accounting. It includes sample financial statements presented using each method, including balance sheets, statements of activities, and statements of cash flows. Supplementary schedules are also presented to provide additional details. The document concludes with discussions of financial audits, accounting software options, tax compliance, and internal financial controls.
3. Sample Local Church
December 31, 20xx
Accrual (GAAP)
Assets
Current Assets
Cash $17,000
Marketable Securities, at market value
Receivables
45,000
2,000 $64,000 Balance Sheet
Property, Plant & Equipment
Land & Buildings, at cost 1,250,000 Assets
Furniture, Fixtures & Equipment, at cost 200,000
Less Accumulated Depreciation -350,000 1,100,000 Liabilities, current & long-
Total Assets $1,164,000 term
Liabilities & Fund Balances Fund Balances, unrestricted
Current Liabilities
Accounts Payable
Accrued Liabilities
$12,000
8,000
& restricted
Notes Payable 15,000 $35,000
Long-term Debt
Mortgage Payable 570,000
Total Liabilities 605,000
Fund Balances
Unrestricted 476,000
Temporarily Restricted 35,000
Permanently Restricted 48,000 559,000
Total Liabilitites & Fund Balances $1,164,000
4. Sample Local Church
Accrued (GAAP)
Year Ended December 31, 20xx
Temporarily Permanently
Unrestricted Restricted Restricted Total
Revenues
Contributions $780,000 $70,000 $5,000 $855,000
Statement of
Investment Gains and Losses
Investment Income
6,000
4,000
6,000
4,000
Activity
Auxiliary--Camp 32,000 32,000
Miscellaneous 4,000 4,000 Revenues &
Released from Restrictions 55,000 -55,000 0
Expenditures are
Total Revenues 881,000 15,000 5,000 901,000
categorized in
Expenditures
Ministry columns based on
Teaching & Preaching
Music
456,000
52,000
456,000
52,000
donor restrictions.
Youth 62,000 62,000 Ending Fund
Occupancy 190,000 190,000
Auxiliary--Camp 35,000 35,000 Balances reported
Interest 28,000 28,000
Miscellaneous 12,000 12,000 here must equal
Total Expenditures 835,000 0 0 835,000 Balance Sheet
Increase (decrease) in Fund amounts.
Balances 46,000 15,000 5,000 66,000
Expenditures are
Fund Balances, January 1, 20xx 430,000 20,000 43,000 493,000 reported by Activity.
Fund Balances, December 31,
20xx $476,000 $35,000 $48,000 $559,000
5. GAAP Supplementary Information:
Functional Expenses
Sample Local Church Expenditures that
were reported by
Year Ended December 31, 20xx
Management Fund-
Program & General Raising Total activity on the
Compensation
Office Expenses
$434,000
19,000
$89,000
22,000
$523,000
41,000
Statement of
Depreciation 12,000 39,000 51,000
Activities are
Utilities 5,000 73,000 78,000 recategorized
Repairs & Maintenance 2,000 31,000 33,000
based on function
Interest 28,000 28,000
Miscellaneous 13,000 68,000 81,000
(program,
management &
Total Expenditures $485,000 $350,000 $0 $835,000
general, or fund-
raising) and nature.
6. Cash Basis Balance Sheet
A portion of the cash and
Sample Local Church
December 31, 20xx
equivalent-to-cash resources was
received from donors who
Assets
designated the purposes for which
Current Assets
Cash $17,000
they could be spent. At the end of
Marketable Securities, at market value 45,000 December, $11,000 of these gifts
Total Assets $62,000
were yet to be disbursed for their
restricted purposes.
Fund Balances $51,000 could be spent for any
General Fund $51,000
Designated Funds 11,000
purpose authorized by the church
Endowment Funds 0 itself since the original donations
Total Fund Balances $62,000
were unrestricted.
7. Cash Basis Report of Receipts &
Disbursements (General Fund)
Sample Local Church
Year Ended December 31, 20xx
Unrestricted contributions and
Receipts
other receipts exceeded
Contributions $160,000 disbursements of these funds by
Investment Income, Gains & Losses 4,000
Miscellaneous 2,000 $8,000 during the year ended
Total Revenues 166,000
December 31.
Payments on long-term debt and
Disbursements
Compensation 68,000 expenditures for long-lived assets
Occupancy 34,000
Mortgage Payments 22,000 (“Capital Expenditures”) are
Capital Expenditures
Office
12,000
19,000
reported as disbursements.
Miscellaneous 3,000 This reporting format (and the
Total Expenditures 158,000 cash basis) is perhaps the easiest
Increase (decrease) in Fund Balance 8,000 to understand among the three
General Fund Balance, January 1, 20xx 43,000
choices.
General Fund Balance, December 31, 20xx $51,000
8. Cash Basis Supplementary Information
Sample Local Church While cash basis
Supplementary Information--Designated Funds
Year Ended December 31, 20xx
reports are easy to
Missions Other Total understand,
supplementary
Designated Fund Balances, January 1, 20xx $4,000 $3,000 $7,000
Receipts 18,000 3,000 21,000
Disbursements -16,000 -1,000 -17,000
information should
Designated Fund Balances, December 31, 20xx $6,000 $5,000 $11,000
be provided.
Sample Local Church
Supplementary Information--Mortgage Activity
Year Ended December 31, 20xx
Mortgage Balance, January 1, 20xx $100,000
Principal Payments $7,000 -7,000
Interest Payments $5,000 n/a
Mortgage Balance, December 31, 20xx $93,000
Accounts Payable Balance, December 31, 20xx $1,000
9. Modified Cash Basis Balance Sheet
Sample Local Church
December 31, 20xx
The modified cash basis omits
long-lived assets and long-term
Assets
Current Assets debt from the balance sheet,
Cash $17,000
but includes short-term
Marketable Securities, at market value $45,000
Accounts Receivable 2,000 receivables and payables.
Total Assets $64,000
This approach avoids budgeting
challenges and other
Liabilities & Fund Balances
Accounts Payable $1,000 shortcomings sometimes
experienced when a strict cash
Fund Balances
General Fund $51,000 basis is used.
Designated Funds 11,000
Endowment Funds 1,000 63,000
Total Fund Balances $64,000
10. Modified Cash Basis Report of Receipts &
Disbursements (General Fund)
Sample Local Church
Year Ended December 31, 20xx
Budgeted
Favorable
(Unfavorable) revenues are
Actual Budget Variances
Receipts
Contributions $160,000 $155,000 $5,000
“projected” while
Investment Income
Miscellaneous
4,000
2,000
5,000
1,000
-1,000
1,000
most budgeted
Total Revenues 166,000 161,000 5,000 disbursements
Disbursements are “authorized.”
Compensation 68,000 67,000 -1,000
Occupancy 34,000 36,000 2,000 Variance analysis
Mortgage Payments 22,000 22,000 0
Capital Expenditures
Office
12,000
19,000
12,000
20,000
0
1,000
can also be made
Miscellaneous 3,000 2,000 -1,000
based on
Total Expenditures 158,000 159,000 1,000
percentage of
Increase (decrease) in Fund Balance 8,000 $2,000 $6,000
actual to budget.
General Fund Balance, January 1, 20xx 43,000
General Fund Balance, December 31, 20xx $51,000
12. Financial Audits
Independent Certified Public Accountant audit
Internal inspection—purposes:
To provide accountability for church leaders and staff
as stewards of the resources God has committed to
the church
To secure the confidence of the members in the
reliability of the church financial reports
To maintain credibility of the church as a self-policing
organization
13. The “Audit” Committee
Organization
Reporting
Report of Audit Committee
Report of Audit Committee
For Year Ended December 31, 20xx
For Year Ended December 31, 20xx
We have inspected the financial reports and related supporting
We have inspected the financial reports and related supporting
records of the church for the year ended December 31, 20xx. The
records of the church for the year ended December 31, 20xx. The
following procedures were completed:
following procedures were completed:
……
In the course of our inspection we identified several
In the course of our inspection we identified several
recommendations that have been communicated to the church
recommendations that have been communicated to the church
leadership.
leadership.
14. Inspection Procedures—Illustrated
Compared budget amounts adopted by the church to actual
receipts and disbursements for the year. Investigated major
discrepancies and received satisfactory explanations.
Traced all significant Balance Sheet amounts to appropriate
supporting documents.
Reconciled Fund Balances reported on the previous year’s
Balance Sheet with current year increases and decreases in
Fund Balances and current end-of-year Fund Balances.
Traced a sample of receipts and disbursements reported on
the Statement of Receipts and Disbursements to
bookkeeping records. Evaluated adequacy of
documentation.
15. Accounting Software for Churches and
Christian Ministries
QuickBooks—Online or Pro (or Peachtree Complete)
Advantages: well-known (likely to find members who are
familiar with its use); easy to use; relatively inexpensive
Disadvantages: not a substitute for formal accounting training;
poor internal controls; Not-for-profit version adds little value
Shelby (or other church-specific softwares) (http://www.shelbyinc.com/)
Advantages: specifically designed for church and ministry
applications; valuable supplementary products available in
donor and church management, etc.
Disadvantages: more expensive & complex
16. Giving Records
Ministries must carefully follow IRS guidelines when
receiving cash and property gifts. IRS Publication 526 can be
helpful.
Software can be very helpful in recording and reporting
donor activity.
Annual reports to donors
$250+ contributions must be specifically acknowledged
(date and amount); otherwise, total contributions can be
reported on annual statements to donors.
Quid Pro Quo Disclosure: “The only benefit provided to
the donor in return for his or her donation was an
intangible religious benefit.”
17. Records Retention
Most financial and employment
records should be retained for
up to seven years.
A copy of each year’s annual
report should be kept
indefinitely.
Minutes of official meetings
should be kept indefinitely.
19. Tax-exempt Status
The most recognized Internal Revenue Code section in the
not-for-profit organization world: IRC 501 (c)(3)
Benefits of tax-exempt status
Ability to receive contributions that are tax-deductible to
donors
Elimination of taxes 1) on profits, 2) on real estate, 3) on
purchases normally subject to sales taxes, and 4) on salaries
and wages that normally require employer-paid unemployment
taxes
Application Form 1023
Annual information return Form 990
20. Internal Controls
Cash receipts—“At no time is uncounted money to be in the
possession of only one person.”
Cash disbursements—Before a payment is made, a ministry
must assure that the product or service was
1. purchased by an authorized individual
following an authorized procedure,
2. received in a useable condition,
3. priced as previously agreed.
Other controls
21. Visit us at www.ministrycpa.com for more
presentations or to connect with a tax professional.
Visit our Q&A blog at
www.ministrycpa.blogspot.com
611 O’Connell Street
Watertown, WI 53094
(920) 261-7012
Member: American and Wisconsin Institutes of Certified Public Accountants
Notas do Editor
Topics: accounting methods fund accounting sample financial statements budgeting financial audits accounting software giving records records retention employee records & reporting tax exemption issues internal controls
The accrual basis of accounting must be followed if a church or Christian applies Generally Accepted Accounting Principles to its financial reporting practices. GAAP is rarely required of smaller churches. Most Christian organizations that have gained tax-exempt status under Internal Revenue Code section 501(c)(3) are required to file an annual report (Form 990) with the IRS that will likely require reporting following GAAP. The Cash Basis is the simplest to understand, especially to lay people and ministers in local churches. Receipts into organization cash accounts are reported as “in” and disbursements from these accounts are reported as “out.” The excess (or deficiency) of cash receipts over cash disbursements during the reporting period must equal the change in cash balances from the beginning to the end of that period of time. For ministries not required to follow GAAP but with a desire for more accurate reporting, I generally recommend a Modified form of Cash Basis. The method can be applied in several different forms based on the preferences of the ministry. However, as long as it is followed consistently from year to year, I believe it produces a good balance of accuracy and simplicity. Over the next few slides I will illustrate the differences using a Sample Local Church set of financial statements and supplemental reporting.
The accrual basis of accounting requires that revenues be recorded at the time they are earned regardless when the cash is eventually received from those paying for the products or services of an organization. Contributions received by churches and Christians ministries are generally recorded as revenues only once a cash or property gift is received. Typically, when revenues are recognized before cash receipts are collected Balance Sheet accounts called receivables reflect the amount of revenues earned but not yet received. The accrual basis requires that expenses be recorded at the time they are incurred as obligations even if payment is not made until a later time. Typically, when expenses are recorded before cash disbursements are made Balance Sheet accounts called accounts payable or accrued liabilities reflect the amount of expenses incurred but not yet paid. While not reflected in the balance sheet presented on this slide, technically, the portion of long-term debt that is due within the next year is classified as a current liability. Accrual (GAAP) balance sheets report all assets, liabilities and fund balances of the organization. Fund balances represent the excess of assets owned by the ministry over the liabilities owed . Churches and Christian ministries must also observe principles of Fund accounting which require the maintenances of separate fund balances depending on the nature of donor stipulations, either 1) with no restrictions or 2) with restrictions as to the use of the gifts. Fund Balances are segregated into following three categories. Unrestricted (also called the “General Fund”)—this portion of the Net Assets (Assets minus liabilities) is available for use by the organization as it sees fit Temporarily Restricted (also called the “Designated Fund”)—this portion of the Net Assets can only be spent as directed by donor designations Permanently Restricted (also called the “Endowment Fund”)—this portion of the Net Assets cannot be spent. (The example above reports that $48,000 of the $559,000 excess of assets over liabilities was Permanently Restricted.) Only earnings on these monies (presumably the $45,000 in marketable securities, plus $3,000 of the cash balance reported under “Assets.” can be spent and then only spent as originally directed by the donor(s)
Revenues and Expenditures are reported (in columns) based on their presence or absence of donor restrictions. As temporarily restricted funds are used in accordance with donor designations, they are “reclassified” as unrestricted donations (note the row for “released from restrictions”) and an identical amount of expenditures from these funds are combined with expenditures from the unrestricted fund. Unrestricted fund budget amounts (slide 10 discusses budgeting in greater detail) should be compared with amounts reported here only after eliminating the affect of this combination.
Supplemental information often accompanies GAAP financial statements, including a report of the total expenses per the Statement of Activities classified based on the functions fulfilled by various expenditures rather than the activities for which they were incurred. Independent auditors generally report on GAAP financial statements expecting additional detailed disclosures to accompany the financial statements.
Organizations using the cash basis record 1) revenues at the time they are received in cash form and 2) expenses at the time they are paid. On the Balance Sheet, only cash and highly liquid investments are recorded as assets. No liabilities are reported. Small ministries that find the cash basis suitable will rarely have received endowment gifts. Even extremely small ministries must maintain accounting of Designated Funds.
The Statement of Activities is replaced by a Report of Receipts & Disbursements. Disbursements are often classified based on their nature of use.
Additional disclosures of designated fund activity, mortgage status, and accounts payable are important supplementary information items.
The Modified Cash Basis adds current assets and current liabilities to the balance sheet reporting. But long-lived assets and long-term liabilities are not included. Budgeting on the strict cash basis can be complicated simply because a current year invoice could be unpaid before the accounting period expired and, thus, not be recorded as a disbursement in the current year. The modified cash basis permits inclusion of any unpaid, but incurred expenses to be reported along with all other amounts related to the reporting period.
While the report here is prepared for one year, interim reports should be prepared often to compare actual results to budget. I recommend the following columns be presented in partial-year reports: actual year-to-date receipts & disbursements, annual budget amounts, percent of actual to budget received or disbursed year-to-date. When GAAP is not used, some church congregations budget to “disburse” a portion of their funds from the unrestricted (General Fund) budget into Designated Fund accounts in order to set aside funds for future use for specific projects (e.g., a vehicle replacement fund). The supplementary information often provided by organizations using the modified cash basis is not significantly different than that which is appropriate for ministries using the cash basis.
Every church or Christian ministry will have a unique chart of accounts. This is one example for a local church using the Modified Cash Basis. Both revenues and expenditures related to Designated Funds are posted directly to fund balance accounts. Posting these transactions to General Fund revenue and expenditure accounts both distorts General Fund budget comparisons and fails to carryover unexpended designated gift balances from one year to the next.
Audits by CPAs are often appropriate for churches and Christian ministries, particularly larger ministries that desire to encourage contributions from a wide-range of sources (not just from the local members of a small church). Some organizations are required to engage independent auditors in order to comply with terms stipulated in loan agreements. Annual fees for these services range from perhaps as little as $2,000 to $25,000 and more. An internal “audit” may help to partially fill a need for accountability when the costs of annual audits are prohibitive. An internal inspection conducted by members of a local church is not an examination in accordance with Generally Accepted Auditing Standards used by Certified Public Accountants. The purpose of a church internal audit policy is three-fold.
Organization of the “audit” committee. The church [or designated group] appoints a minimum of two or more individuals to conduct an annual inspection of church financial records and reports. Each committee member should have a background that indicates God-given gifts in understanding financial concepts. The members should not be related to the church treasurer, financial secretary, pastoral staff, or anyone else with direct financial responsibilities at the church. The committee should conduct its inspection after the close of the church's fiscal year but before the time when the financial reports are to be presented in their final form to the church membership. The committee should elect its own Chair, who is responsible to lead the inspection, oversee preparation of the committee's report, resolve any conflicts, and retain custody of the committee's work papers, including annual inspection checklists. When a committee of internal “auditors” presents its report of its inspection, the following principles should be applied. Accompanying the financial reports to the church, the committee should report its findings. The report should not borrow language from audit opinion letters written by CPAs. Rather, the committee should list the procedures which it followed. The report should conclude with committee recommendations and comments, if any. If it is ever suspected that gross errors, intentional or not, have been made, church leaders not connected with the discovery should be advised and professional assistance should be sought.
The above list is illustrative only. Committee members must use their judgment to determine the most appropriate procedures to complete. Other inspection procedures: Determine compliance with offering count and expenditure authorization and disbursement procedures. Review prior years’ audit committees’ recommendations to the church leadership; compare with current practices. Reconcile payroll expenses reported on IRS filings to those reported in the financial statements. Test interest and principal payments on long-term debt for reasonableness given the unpaid balance and interest rate. Inquire regarding off-Balance Sheet liabilities. Inspect insurance policies to assure that assets are adequately protected. Reconcile investment income with summary reports from securities companies.
Peachtree Complete is only slightly more expensive than QuickBooks. It offers significantly better accounting controls. However, it is definitely less well-known among typical church members who may be asked to serve in volunteer accounting roles.
Other pertinent IRS Forms and Publications include: Form 8283, Noncash Charitable Contributions Publication 78, Cumulative List of Organizations (lists most organizations qualified to receive tax-deductible gifts) Publication 561, Determining the Value of Donated Property Software alternatives – Ministries use software to record and report contributions. There are many options including products offered at the following websites. http://www.fundraisersoftware.com/ (“Starting at less than $200 a month for a single user, with minimal startup fees, FundRaiser Online is affordable and scalable for any budget.”) http://www.memplushome.com/ (Membership PLUS Standard v11 MSRP $249.95 --one time purchase) Some online versions may be available for significantly less cost. Quid Pro Quo (f rom the Latin meaning "something for something") – donations for which donors receive a tangible benefit in return are not 100% deductible.
At the end of each year, many ministries store and label boxes of financial records with “Destroy” dates seven years later. This is a very basic presentation. More detailed disclosures can be found at sites such as the following. http://www.ecouncil.org/records&time.htm
The US Military has no superiority over the IRS when it comes to the volume of forms it requires. W-2 / W-3 Annual Wage and Tax Statement and transmittal form (W-3) due Jan 31 of following year W-4 / I-9 Forms required at time of employment (W-4 Employee's Withholding Allowance Certificate) (I-9 Employment Eligibility Verification) 1099-MISC Report of Miscellaneous Income. Most often required for non-employee compensation > $600 per year paid to evangelists and other speakers to whom checks are personally written (checks to missions agencies do not require issuance of Form 1099-MISC) 941 / 944 Quarterly Form 941 (or, for certainly small employers notified by the IRS, annual Form 944) is used to report and pay federal withholding taxes. State withholding forms may also be required. FUTA / SUTA Churches and most 501 (c)(3) organizations are exempt from federal unemployment tax act (FUTA) payments and similar state (SUTA) taxes.
According to IRS Publication 557, “an organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes.” Of the eight purposes listed, the first is religious . The Publication continues: “To qualify, the organization must be a corporation, community chest, fund, or foundation. However, an individual or a partnership will not qualify.” It must file the 26-page Form 1023, pay a user fee (typically $850), submit copies of its Articles of Incorporation and Bylaws, and provide several additional documents listed on two pages following page 26 of the Form 1023. As required by the “Paperwork Reduction Act,” the IRS has estimated the average time to complete the application process; it is in excess of 15.4 hours. An estimated 174 hours are needed to complete “recordkeeping” and for “learning about the law and the form.” Fortunately, churches are not required to file Form 1023 to qualify for tax exemption (Publication 557). The definition of a church is a challenge for the IRS. It states in Publication 557, “because beliefs and practices vary so widely, there is no single definition of the word church for tax purposes. The IRS considers the facts and circumstances of each organization applying for church status.” Most non-church tax-exempt organizations are also required to file each year a laborious Form 990.
The leadership of a church or Christian organization is required to safeguard its assets. This includes securing adequate insurance against unreasonable risks of loss. Maintaining appropriate controls over the internal functions of the ministry also must be addressed. For churches, the primary cash receipt measure relates to the collection, counting, recording and depositing of offerings. Various procedures are followed by local churches, but one overriding principle must be observed: “At no time is uncounted money to be in the possession of only one person.” There are at least three purposes for church policies and procedures governing offering collections and counts. 1 st —sensibly designed procedures protect the integrity of all custodians of cash from unwarranted suspicion. 2 nd —these same procedures assure donors of the careful security, secrecy, and stewardship maintained relative to contributions. 3 rd —offering collection and count procedures are established to observe God’s instructions regarding accountability for church collections. The apostle Paul was very careful with money (I Corinthians 16:3,4). He was adamant that someone would go with him if he would deliver the offering from the church to the saints in Jerusalem. Again in chapter 8, verse 4 of his second letter to the Corinthians, Paul, speaking regarding the churches of Macedonia and their gift, says “praying us with much entreaty that we would receive the gift and take upon us the fellowship of the ministering to the saints.” Verses 16-24 of the same chapter reiterate Paul’s extreme care to “provide for the honest things, not only in the sight of the Lord, but also in the sight of men.” Other internal controls over cash receipts may also be necessary for many Christian organizations. These ministries should apply common business practices in these situations. Similar to internal controls over cash receipts, cash disbursement controls used by businesses are commonly application in ministry settings. Other controls should be established related to: bank accounts and reconciliations, compensation and benefit authorization, property, plant, and equipment inventories, corporate resolutions for authority to borrow, and many other categories