Church Accounting: The Definitive Guide For Growth
Monday, July 19, 2021
When you became a leader at your church, you did so because you felt called by God to help spread the Word and to make a difference in your community. If you already have a background as a CPA, you’re a minority in the leaders in the industry.
If you don’t have your CPA, no worries! That’s why we’ve put together this guide, to help church professionals become acquainted with the accounting systems for their institutions.
Churches more often than not fall under the 501(C)(3) tax code.
Like nonprofit charities, your church is exempt from paying federal income tax under this classification. It also means that you likely use a system of fund accounting for your church, separating your revenue sources into a number of buckets according to their uses and allocation at the organization. This helps churches focus on accountability to their supporters and congregation.
Because this focus on accountability differs greatly from the for-profit mindset of profitability, even professionals with a basic understanding of for-profit accounting can benefit from a review of church-specific accounting practices. In this guide, we’ll cover the following:
- What is Church Accounting?
- How is Church Accounting Different?
- What Should You Look for in Church Accounting Software?
- Is it Better to Hire or Outsource a Church Accountant?
Let’s start from the very beginning with a definition of church accounting. This will help make sure we’re all starting with the same foundations on the topic before diving deeper.
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What is Church Accounting?
Church accounting is the organization, recording, and planning of finances for churches. It differs from other organizations because it relies on a system of fund accounting, prioritizing the accountability aspect of finance over profitability.
Churches rely on a number of different sources of revenue to advance the mission. The majority of these revenue sources rely on the generosity of your church’s congregation and community support. For instance, churches may receive funding from:
- Gifts and tithing
- Pledge drives
- One-off donations
- Fundraising campaigns and events
- Capital campaigns
As you can see, each of these revenue streams relies on the good nature of your church’s supporters and congregation for success. Sometimes, restrictions accompany these revenue sources so that certain monies must be spent on specific activities. For example, grant monies might be restricted to a scholarship program.
These restrictions dictate the buckets or “funds” that church money is separated into in their finance systems. This is why fund accounting is so important for churches, allowing them to remain cognizant and respectful of these restrictions.
In the above image, you can see how in general accounting, the income is recorded in the general ledger, which also indicates the amount you have for your expenses. Meanwhile, in fund accounting, the income is recorded in various “funds” including the general ledger, grant fund, and scholarship fund in this example. The funds donated for these purposes are then used to promote those related programs.
The focus of church accounting is always on advancing the mission and goals of the church itself, reinvesting all revenue back into the organization itself to advance objectives.
As a 501(C)(3), churches are also required to follow the generally accepted accounting principles (GAAP) for various documents and reports and comply with the requirements set in place by the IRS.
How is Church Accounting Different?
As we mentioned, church accounting differs greatly from for-profit accounting practices. This makes sense! After all, your church operates differently from a for-profit, so having financial practices that are more applicable to your actual situation will make your budgeting and financial management more accurate and efficient.
Let’s explore the most prominent ways that church accounting differs from for-profit accounting standards.
Accountability vs. Profitability
Churches, like nonprofits, rely on the generosity of their supporters to fund their organizations. Therefore, the polite (and necessary) thing to do is to respect these supporters’ wishes for how they want their contributions to be allocated at your organization.
Even when restrictions aren’t placed on the contributions, they should all be reinvested back into making your organization better and more impactful. This ensures your organization is remaining respectful and responsible with the funds generously given to your church.
This primary focus on accountability differs from for-profit organizations that focus their efforts on being profitable.
Before you allocate funds, be sure to ask yourself how that allocation will help advance your church and your church’s mission. That way, when you run reports at your organization, the story those reports tell will show how your church uses funding responsibly.
When for-profit organizations make a sale of their goods or services, the revenue earned and expenses made are all added to a single general ledger. This ledger is self-balancing and keeps track of all financial transactions for the company.
However, churches are different. Because your church doesn’t sell goods or services, you need more than a single general ledger. You need a series of ledgers to describe the different uses for the money at the church.
Churches can designate these smaller ledgers according to restrictions, bite-sized budgets, and other allocations at the organization. Ultimately, these ledgers are then organized in a greater chart of accounts to keep everything organized.
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Financial documents and reports are used to tell the story of your church’s accounting activities and check in on the financial situation of the organization. This is another place where the regular practices at churches differ from those at for-profit companies.
In lieu of certain for-profit accounting documents, churches use slight variations to describe the financial health and positioning of the organization.
Statement of Activities
While for-profits use income statements to describe the revenue earned at the company over a specific period of time, church accounting dictates that church organizations use a statement of activities instead.
A church’s statement of activities describes the revenue, expenses, and net changes in assets for the organization over a specific period of time.
This statement allows your church to see your revenue sources and how you leverage the resources at your disposal toward activities that advance the church’s mission.
Statement of Financial Position
Companies use a balance sheet to show the assets, liabilities, and net worth (or equity capital) of the for-profit organization. Meanwhile, churches leverage a statement of financial position to show the organization’s liabilities and assets to get an idea of the net assets of the organization.
The main difference between a standard balance sheet and a statement of financial position is that the balance sheet puts finances in terms of equity.
Because churches are not technically owned by anyone, there is no equity to be shared among stakeholders. Instead, churches simply use this sheet to understand their assets and liabilities at the organization.
Statement of Functional Expenses
Because churches function as nonprofit organizations, they’ll need to compile a statement of functional expenses, a financial statement unnecessary for for-profits. Churches must provide detailed characterization of the expenses they incur.
The statement of functional expenses helps churches gain detailed inside views of how their funding is used to help the organization succeed.
Understanding your church’s expenses will help you better allocate resources realistically in the future. For example, if you estimate that you’ll spend $15,000 on mission work, but realize that you usually spend closer to $20,000 after looking at your statement of functional expenses, you can make necessary adjustments in your budget moving forward.
While these are the financial documents and reports that make church accounting different from for-profits, they also share a couple of similar documents and reports that help provide additional insight into the organization’s financial situation. For instance, both for-profits and churches alike will compile the following documents:
- Annual budget to plan out the revenue and expenses for a set timeframe.
- Cash flow statements to measure the cash flowing into and out of the organization.
Church accounting and accounting at a for-profit company differ greatly from one another. This means that when you rely on various resources, whether that’s an outsourced CPA, template reports, or a software solution, you’ll need to look for fund accounting specific solutions.
What Should You Look for in Church Accounting Software?
If you’re keeping your financial information in a spreadsheet currently, it’s probably time to upgrade your system. Accounting software helps make the bookkeeping process easier and allows organizations to automate the reporting process. This helps maintain consistency in your reporting and makes financial information comparable between set periods of time.
When you invest in a church accounting software solution, be sure you choose one that will account for the financial intricacies of the fund accounting system.
A fund accounting software solution will include features that are specific to either nonprofit or church accounting needs. For instance, it might include features such as:
- Grant management tools. Grant monies are often accompanied by a number of restrictions that churches must adhere to in order to remain compliant and accountable to the grant funder. Be sure you can allocate various grant funds appropriately.
- Budgeting tools. Compile your annual budget, then be sure you can save each budget to compare these numbers from year to year in order to make future projections more accurate. Be sure you’re also able to revisit this budget to make necessary adjustments as actual expenditures and revenues vary throughout the year.
- Fund accounting reporting tools. Earlier, we walked through a number of the unique financial documents that churches need to compile in order to gain the financial insights they need. Therefore, be sure whatever software you invest in will provide you with the templates and standard reports necessary for church accounting.
While there are a number of accounting solutions out there that can handle fund accounting, Quickbooks is the name that’s most well-known in the space. They offer several versions of their solution depending on the industry your organization functions in. Therefore, this solution will offer church-specific accounting needs.
Here at Jitasa, our accounting team helps churches open up an account at Quickbooks to help keep all relevant financial information organized and to set up reporting features.
Is it Better to Hire or Outsource a Church Accountant?
As we mentioned, very few church professionals entered the industry to start their accounting careers. Rather, your industry is full of individuals who feel called by God to serve their communities and spread the Word. Therefore, you’ll likely look for outside sources to handle the accounting tasks at your church.
This leaves most churches with two options to handle their accounting needs: hiring or outsourcing.
Hiring an In-House Accountant
In-house accountants tend to be the right choice for large churches who have the resources available to hire someone for the full-time position. While this option is a little more expensive, you’ll be able to find someone who dedicates all of their time to your organization, helping them become very familiar with your church and its specific needs.
Outsourcing Your Church Accounting Needs
For the majority of churches, outsourcing your accounting needs makes much more sense than hiring someone to fill the full-time position of a church accountant. While you won’t receive the specialized attention of someone spending all of their time with your church, you’ll gain something just as valuable: experience.
Outsourcing your church accounting needs means you’ll be working with an experienced church accountant who has encountered any number of questions and issues at other churches, helping them understand the best methods to overcome the most common hassles.
Plus, most small churches don’t need someone full time to look after their finances. Outsourcing provides an affordable option that provides churches with the expertise they need in an accountant.
Church accounting is a unique form of financial management that helps church professionals like yours to gain insider knowledge about the financial health and position of the organization. Plus, you’ll be able to make plans within the scope of financial possibility at your organization while maintaining as high of an impact as possible.
We recommend churches like yours think long and hard about who will be best suited to handle the accounting needs of your organization. For the majority of small to mid-sized organizations, outsourcing your accounting needs is the best option. It provides you with the expertise and experience you need to ensure healthy financial situations.
Jitasa can help! Check out our accounting and bookkeeping services specifically for church organizations to learn about how we can manage your church’s accounts and provide financial insights to help you succeed.
If you’re looking for more information about accounting and bookkeeping for churches, check out these additional resources:
- Outsourced Bookkeeping and Accounting for Churches. See how Jitasa’s bookkeeping and accounting services can help your church maintain organized finances.
- Nonprofit Accounting: A Guide to Basics and Best Practices. Churches operate as 501(C)(3) organizations, meaning their accounting principles are very similar to that of nonprofits. Check out this guide to learn more about it.
- Grant Management: A Nonprofit’s Complete Guide. Grants are a major funding source for your church. Learn more about how they fit into your accounting systems with this guide.