The way churches structure their accounting really starts at what the accounting standards dictate and what the users want to see in the reports. In essence, the church must start at the end – the reports – and work their way backwards to see what will produce the desired result.
Now that we have examined the definitions and taken a look at the standards, we will take a look at some common scenarios for churches and see how they could best record the transaction.
Important: This is part two of a four-part series. If you missed it, make sure to read the first post, The “You don’t have to be a CPA to learn Fund Accounting” Series: Part 1 before moving on to the following scenario!
Keep in mind that in accounting, as in life, there is sometimes more than one way to get the result you want! We will first present the scenario and then illustrate several different ways in which the transaction could be handled. We will also provide pros and cons to each method presented.
Fund Accounting Scenario:
The church receives a total of $1,000 on a particular Sunday. There are no donor-imposed restrictions on the money.
Solution #1:
The church could set up a Donation fund called “General Offerings” in the donation module. They could also set up an Accounting fund called “General Fund” in the accounting module. This “General Fund” would be designated as an Unrestricted Net Asset. They would also set up a general ledger revenue account called “Donation Revenue” in the chart of accounts. They could use the accounting link feature in the donations module and link “General Offerings” to the “Donation Revenue” general ledger account.
The linking mechanism creates the following accounting entry for this transaction:
| Debit | Credit | Fund Assignment | |
| Cash – Checking | $1,000 | General Fund | |
| Donations Revenue | $1,000 | General Fund |
Pros:
- Donations are only entered once because of the linking between the donation and the accounting modules.
- The donor will receive on his year end donation statement the $1,000 listed under the “General Offerings” category.
- The $1,000 is correctly reported on the financial statement as revenue.
- The revenue is assigned to the General Fund which is classified as unrestricted.
Cons:
- None
Solution #2:
This is the same solution as the first, except the church does not utilize the linking feature between the donation and accounting modules. After the $1,000 is recorded in the donation module, the church will have to go into the accounting module and manually make the following general journal entry:
| Debit | Credit | Fund Assignment | |
| Cash – Checking | $1,000 | General Fund | |
| Donations Revenue | $1,000 | General Fund |
Pros:
- The donor will receive on his year end donation statement the $1,000 listed under the “General Offerings” category.
- The $1,000 is correctly reported on the financial statement as revenue.
- The revenue is assigned to the General Fund which is classified as unrestricted.
Cons:
- Since the linking mechanism was not used, the $1,000 has to be entered twice: once into the donation module and again into the accounting module. This increases the amount of time needed and increases the risk of errors being made.
As the examples throughout this series will illustrate, there are often many ways to get to the seemingly same end result.
Both solutions outlined in this example use a different way to reach the same result. The first solution has some very clear options, but may not be the way your church chooses to function. Good software should allow you to use either solution. Time should be spent looking at how your accounting system is structured and asking yourself the following questions:
- Am I in compliance with accounting standards?
- Am I making the most efficient use of our time, talent, and resources or can software help me streamline some of our current processes?
- Am I producing financial statements and reports that are meaningful to users (e.g. pastor, board of directors, finance committee, church members)?
If you are using a good church accounting software package and organizing it correctly, you should be able to answer “yes” to all of the above questions.
Make sure to subscribe via email or RSS so you don’t miss anything!
Ready to try Fund Accounting? Sign up for a FREE 30-day trial of IconCMO, the web-based church management software.
This post was written by Karla, an accountant with Icon Systems:
Karla is a CPA licensed in the states of Minnesota and North Dakota and has over 20 years of accounting experience. She has a servant’s heart for working with churches. When not at work, she enjoys gardening, reading, Bible study, and spending time with her friends and family.
Next: The “You don’t have to be a CPA to learn Fund Accounting” Series: Part 3
