Don’t Let Bad Bookkeeping Hurt Your Church: Learn Accounting Tips That Work

Image of an accountant doing church accounting bookkeeping

Just like any organization, churches require reliable bookkeeping and accounting systems. They need someone to keep track of expenses, and how much money comes in through fundraising and other channels. Without a strong system in place, churches could end up facing fines and penalties and may deal with general financial disorganizations.  

Churches may be at a disadvantage. Due to limited budgets, they may not be able to afford experienced bookkeepers. However, with the right training and systems in place, they will achieve a reliable church accounting system.  

Read on to learn what you should know about church bookkeeping.  

 

Table of Contents  

  

 

What is Church Bookkeeping and Why is It Unique? 

Church bookkeeper going over their church's accounting and bookkeeping

Church accounting varies from for-profit accounting. Here are some differences to be aware of.  

Basics of Church Bookkeeping 

Just like any type of bookkeeping, church bookkeeping supports an organization’s operational efficiency. It helps identify key expenses, eliminates unnecessary expenses, and supports efficient resource allocation. It guides financial decisions.  

However, it has a different focus than for-profit bookkeeping.  

Differences Between Church and For-Profit Accounting 

A for-profit business focuses on maximizing profits. Churches aren’t allowed to turn a profit. Therefore, their accounting systems focus on accountability.  

The following equations will demonstrate the difference between for-profit and nonprofit accounting.  

  • In for-profit accounting, assets - liability = owner equity.  
  • In nonprofits, the equation is assets - liabilities = net assets.  

Nonprofits rely on a system of fund accounting. It requires setting up various funds for different missions. Systems are typically more complex. Organizations may rely on designated church management software to ensure optimal results.  

Unique Accounting Needs for Churches 

Church accounting must focus on the following.  

  • Fund accounting: Fund accounting is unique to organizations that don’t turn a profit. It focuses on accountability rather than profitability. The system ensures the money raised is used to support specific projects.  
  • Restricted vs. Unrestricted Funds: Church accounting uses restricted funding and unrestricted funding. Restricted funding ensures specific funds are spent on designated projects. Unrestricted funds are more flexible.  
  • IRS compliance: Churches are required to report their income to the IRS. They must be compliant with IRS regulations to avoid audits, fines, and penalties and to protect their reputation.  

 

 

Fund Accounting for Churches 

Here is some more insight on how fund accounting works. 

What is Fund Accounting?  

Fund accounting helps churches determine where their money is going. It helps with IRS reporting. It restricts certain assets and ensures they have enough money to cover operational expenses.  

Handling Restricted vs Unrestricted Funds 

Money coming in is designated as restricted and unrestricted funds. Restricted funds are used for a specific purpose. Unrestricted funds are used to cover necessary operating expenses like salaries, rent, and utilities.  

There are also temporarily restricted funds with donor-imposed restrictions that determine how money is used in the future.  

Ensuring Proper Allocation and Reporting 

Here are some tips to keep in mind to ensure funds are properly allocated and reported accurately.  

  • Separate Funds: Separating funds will help organizations identify where money is coming from and going. Start by grouping funds according to similar characteristics. Then split them into subgroups for enhanced transparency.  
  • Maintain Internal Controls: Document workflows to reduce confusion when bookkeeping staff turnover occurs. Note process updates, and review documents regularly to identify areas of improvement. Split up tasks among employees to speed up the process and familiarize your team with relevant changes.  
  • Keep Records Accurate: Reliable software will support accuracy. You should also conduct regular financial reporting to ensure your records are accurate.  
  • Set Budgets: Reporting systems will guide church budget planning.   

 

 

Best Practices for Church Bookkeeping 

Here are some other best practices to keep in mind to ensure a smooth church accounting process.  

Establish a Chart of Accounts 

A chart of accounts (COA) is a list of all the accounts a church uses to record their transactions in the general ledger. It helps organization leaders understand the church accounting structure. The system organizes financial data, improves reporting, ensures compliance, and supports efficient auditing and reconciliation.  

The COA is typically divided into five categories: assets, liabilities, equity, revenue, and expenses. It reflects the church's financial activities. It follows a normal business structure with exceptions due to fund accounting methods, non-income sources of revenue, varying expense categories, and non-exempt tax considerations.  

This video provides more guidance on how to set up a chart of accounts.  

 

Tracking Donations, Tithes, and Fundraising Income 

Churches use a record-keeping system and fund accounting to keep track of donations, tithes and fundraising income. Accurate record-keeping ensures every penny donated to the church is accounted for. Fund accounting tracks how funds are used.  

Managing Payroll and Expense Tracking 

Churches use church expense tracking which helps them manage their payroll, expenses and budget and plan ahead. Many software systems will record payroll and other expenses to ensure they are categorized appropriately. The church may also have expense policies in place that define what the organization can do with its funds.   

Implementing Internal Control 

Implementing internal controls can prevent fraud and boost accountability. Here are some recommended practices.  

  • Educate church leaders and employees about possible risks so they reduce vulnerabilities and create a risk management plan.  
  • Focus on Controls: Ensure all accounting activities are overseen by multiple parties to ensure accountability.  
  • Integrate Technology: According to an Association of Certified Fraud Examiners, 6.6% of all Christian church funds are lost to fraud and embezzlement. Ensure the technology you use has security controls that protect against fraud.  

Schedule Regular Audits 

Churches may consider scheduling regular internal audits to prepare themselves if the ‘real thing’ occurs and to ensure bookkeeping accuracy. To conduct an audit, you must: 

  • Identify Your Objectives: What are you hoping to learn from your audit process?  
  • Set up a Plan and Timeline: Plan out activities like gathering documentation, conducting interviews, performing analytics, testing controls, and risk assessment. 
  • Analyze Findings: Identify issues and how they may impact financial reporting and make the necessary improvements.  

 

 

Choosing the Right Accounting Methods for Churches 

Churches must choose accounting methods that are suited to their organizational needs. Options include: 

Cash vs. Accrual Accounting 

  • Cash accounting: With cash accounting, transactions are recorded when money is received, or expenses are paid out. Transactions are not recorded when they occur.  
  • Accrual Accounting: With this method, transactions are recorded when they occur, not when money is paid or received.  

Accrual accounting provides more insight into budgeting and financial planning, but it is more complex to manage. However, it is recommended for churches that align with GAAP principles. 

Choose the system that is best for you based on your church size and financial goals. You may also consult an accountant to determine which is most suited to your needs.  

Benefits of Fund Accounting 

Fund accounting is a must for church organizations. It segregates funds by their intended use allowing the church to demonstrate high levels of compliance and financial accountability.  

Here are some other benefits to consider:  

  • It helps the church maintain accountability and transparency: The categorized system allows donors to see exactly how their funds are used.  
  • Provides a clear view of the church’s performance: It provides insight into budgeting and reveals whether funds are used effectively.  
  • Ensures compliance: The oversight of fund accounting ensures organizations comply with IRS and donor requirements.  
  • Enhances fundraising efforts: Fund accounting promotes trust making donors more willing to donate.  

Aligning with GAAP and IRS Regulations 

Churches may choose to align with Generally Accepted Accounting Principles (GAAP) when recording financial data. The principles are as follows: 

  • Principle of Regularity: Church financial statements should be prepared and reviewed regularly.  
  • Principle of Consistency: Accounting practices should remain consistent over time. 
  • Principle of Sincerity: The principle supports honest accounting.  
  • Principle of Non-Compensation: Accountants should not use offsetting accounts to hide facts such as debts behind assets and costs behind revenue.  
  • Principle of Prudence: Accounting should be based on facts, not speculation. 
  • Principle of Continuity: Accountants should work on the principle that business will continue operating as it always has been.  
  • Principle of Periodicity: Revenue should only be reported at regular intervals, typically monthly or yearly.  
  • Principle of Materiality: All financial data should be recorded in a GAAP-compliant report.  

This video will ensure you understand GAAP compliance.  

 

Organizations must also align with Internal Revenue Service (IRS) regulations which mandate that churches file Form 990 (Return of Organization Exempt from Income Tax). The form must be filled out accurately for optimal compliance.  

 

 

Budgeting for Churches: Building Financial Stability 

Once churches have a handle on their finances, they can begin creating a budget. Here are the steps involved.  

Steps to Create a Comprehensive Church Budget 

  1. Assess Your Church’s Financial Health: Assess your assets, liabilities, sources of income, and expenses to better understand your church’s financial health.  
  2. Calculate Your Budget Baseline: To calculate a baseline budget, you must track the income your church has brought in. Here is an equation to follow:
    • Last year’s income year’s expenses Net position 
    • Last year’s income + Net position = Baseline budget 
  3. Forecast Income and Expenses: Your baseline budget will indicate your future income. However, you must also anticipate increasing expenses due to inflation, church growth, and expanded marketing efforts.  
  4. Prioritize Expenses: Determine where your church makes the most money. These are likely your high-priority expenses. Determine ways to cut costs if possible. You may also consider setting up an emergency fund to cover unexpected expenses.  

Vanco’s free budgeting template guide can support your efforts.  


Monitoring and Adjusting Budgets 

Continue monitoring your budget by comparing the actual and expected outcomes of your financial activities. You should also consider KPIs like return on investment and rate of return. Determine areas of weakness and make necessary improvements.  

Involving Leaders and Staff 

You may achieve better budgeting strategies by consulting with leaders and staff members. Here are some pointers that will help you achieve optimal collaboration: 

  • Host Meetings: Host meetings with leaders and staff after financial reviews to gain insight on what improvements can be made.  
  • Share Reports: Share budgeting reports with colleagues and solicit their feedback.  
  • Set Clear Objectives: Set clear budgeting goals to ensure everyone is on the same page.  

 

 

Church Statements and Reporting 

Churches should create statements and reports for reviewing purposes. Here are some best practices to keep in mind when gathering this information.  

Key Financial Reports 

Accountants should be familiar with key financial reports. These generally include:  

  • Balance Sheets: A balance sheet will show details of your organization's assets and liabilities for a given timeframe.  
  • Profit and Loss: Profit and loss statements summarize your organization’s revenues, costs, and expenses for a specific period. 

You can also run reports on expenses, cash flow, revenue and more. However, balance sheets and profit and loss reports provide overall insight into your financial health.  

Most software systems will run reports automatically saving you the hassle of gathering data and consolidating it.  

Best Practices for Reporting Frequently 

Churches should run reports to review their finances regularly. Typically, finances are reviewed monthly for reconciling purposes. However, reports should be created and assessed by church leaders every quarter and as needed.  

Interpreting Financial Reports 

If you do not have accounting skills, a financial report can seem like another language. However, there are some key elements to focus on as follows: 

  • Detailed Income Breakdown: This section will tell you how much income is generated from tithes, donations, offerings, and other income sources.  
  • Expenses: Expenses should be listed in detail so you can determine operating costs, mission-related expenses, salaries, and so on.  
  • Asset and Tracking Liability: Here you will see the value of your assets and outstanding liabilities.  
  • Fund Designation: Your report should state funds that are earmarked for specific purposes.  
  • Notes and Explanations: Notes and explanations may help give context to some elements of the report.  

 

 

Accounting Software for Churches 

Churches will have an easier time organizing their finances with the right accounting software. Aaron Goin, CFO of Faith Promise Church has stated that switching to financial software has saved his church $85,000 a year in salaries and benefits and allowed it to double in size while minimizing staffing needs. The information in this section will ensure your organization makes the right software choice: 

Features to Look for in Church Accounting Software 

  • Fund Tracking: Fund and donor tracking is necessary for church accounting. Ensure your system supports this bookkeeping method.  
  • User-Friendliness: The program should be easy to use for a seamless transition and to minimize training needs.  
  • Integrations: The church financial software should integrate seamlessly with the programs you currently use, including your giving provider.  

Top Software Options 

There are several software options to choose from. They include: 

QuickBooks 

QuickBooks is among the most popular accounting software tools. It’s easy to use and intuitive and it offers several guides and tutorials. The system saves organizations tons of money as compared to hiring a live accountant.  

However, QuickBooks is not great for religious organization accounting. To adequately handle church accounting, you must sign up for QuickBooks Online Plus or QuickBooks Advanced both of which add to costs. Additionally, if you have trouble setting up these systems, the platform does not provide any human assistance.  

Dedicated Church Tools 

Churches may be better off using software that’s specific to their needs. Popular tools include: 

  • ACS Technologies: ACS Technologies offers flexible church accounting for organizations of all sizes and denominations through their four church management software systems: Realm, Ministry Platform, PDS and ACS. The fund accounting software is built specifically for churches. It also offers additional features like giving tools, community analytics, engagement tools, and mission trip tools.  
  • Planning Center: Planning Center provides various software tools that help churches organize information, plan events, and communicate. The scalable system adapts to your needs. The tool is easy to learn, and human support is available.  
  • PowerChurch: PowerChurch is a church software management tool that tracks membership, contributions, and other donations. It also offers an accounting program.   
  • Church Windows: Church Windows offers four modules to simplify data. Its accounting system offers fund accounting capabilities ideal for everyone from beginners to experienced CPAs. It also offers church payroll services that meet a church’s specialized needs.  
  • Concordia Technology Solutions: Concordia’s church software simplifies administration by managing budgets, accounts, and other member information. Its accounting systems, within its Church360 and Shepherd’s Staff software, offer straightforward reporting, secure audits and custom permissions. The tool also supports online giving.  

Look for platforms that integrate with church management systems and online giving programs.  Vanco provides integrations with all of these providers, allowing churches to streamline work.  

Implementing Software 

Most systems will walk you through the implementation process. However, it may not hurt to have someone with an IT background nearby.  

Implementation requires data migration. You may need to clean standardize and transform your data to fit the new system’s structure. The Extract, Load, Transform (ETL) process can help standardize data and load it into the new system.  

You must also train your team on the new system. Schedule training to ensure it doesn’t interfere with daily operations. Consider getting an expert to teach new systems.  

Once systems are implemented, revisit them to determine if they are boosting efficiency in your organization. You may need to customize them to ensure they meet your church's accounting needs.  

 

 

Financial Transparency and Reporting 

A well-organized financial system breeds transparency. Here’s why it’s important in a church organization.  

Importance of Transparency 

An accurate accounting system does more than ensure IRS compliance. It breeds a sense of church financial transparency between your members and your team. You can present reports that detail how money is spent leaving no room for doubt.  

Transparency is especially important in church environments where organizations count on their members’ support. Accurate accounting will back a straightforward system that promotes trust and a sense of community.  

Despite the importance of transparency, few churches promote it through financial reporting. According to BusinessingMag, 92% of churches create financial reports, but very few share them with their congregation. Churches should aim to turn this around with transparent reporting systems.  

Clear and Consistent Reporting 

Church leaders should also set up a system to ensure reports are reviewed monthly, quarterly, or annually. That way, leaders will know when to expect reports further breeding optimal transparency.  

Reports should also be presented in a digestible format. If members receive reports they don’t understand, it could breed distrust. You can make reports clearer by inserting notes that explain complex sections.  

You may also go through reports during financial meetings to explain what each figure represents.  

Using Transparency to Strengthen Trust 

Churches rely on members’ donations for funding. Therefore, donors need to know how their money is used. A lack of transparency has been linked to church abuses.  

The Evangelical Council for Financial Accountability assists churches in ensuring they remain accountable. They uphold the following standards: 

  1. Every organization shall be governed by a board of at least five people who meet annually to review its accomplishments. 
  2. Every board will prepare accurate financial statements.  
  3. All resources shall be used in compliance with laws.  
  4. Every organization must present financial transactions upon written request.  
  5. Every organization must address leader compensation matters with integrity following the FCFA’s Excellence in Compensation policy.  
  6. Organizations must be honest about income and expenditures.  

 

 

Accounting Solutions for Small Churches 

Small churches may encounter challenges when setting up accounting systems as many are unable to pay professionals to handle the task. Here are some tips that ensure success.  

Setting Up a Simple Accounting System 

Organizations should set up systems that either are built into the church management software (ChMS) or integrate with it. These built-in capabilities and integrations will automate a good portion of the accounting, reducing the amount of bookkeeping work.  

Here are some other practices that support a simplified accounting system:  

  1. Gather Documents: Gather statements from each bank account and other assets. You should also create a list of your church’s restricted funds and each fund balance. Doing so will help you create a chart of accounts.  
  2. Choose the Best Fund Accounting Software: Fund accounting software simplifies the bookkeeping process. Choose the one that’s best for your organization based on functionality, ease of use and integrations.  
  3. Establish Your Funds: Add your current financial data to your software program including your assets, liabilities, chart of accounts, and restricted funds.  
  4. Determine Your Reporting Process: Determine a reporting process that outlines how often reports are gathered and who you will report to.  

Training Volunteers for Bookkeeping Tasks 

Churches that don’t have much of a budget may consider training volunteers to handle bookkeeping tasks. Bookkeeping is a valuable skill to learn. You may be able to attract young people hoping to launch an accounting career.  

Managing Finances with Limited Resources 

Here are some other ways to manage finances with limited resources.  

  • Seek Out Free Church Finance Guides: You can find several church finance guides online that provide tips on how to manage finances.  
  • Leverage Technology: Bookkeeping software may be an additional expense, but it simplifies church bookkeeping and accounting, and it is much cheaper than hiring a professional.  
  • Develop a Financial Strategy: Develop a strategy to avoid confusion that can add to expenses.  

 

 

Outsourcing vs. In-House Accounting 

Most churches have an in-house accounting staff. However, there are some instances where it makes sense to outsource. This section will explore the benefits and disadvantages of each.  

Pros and Cons of In-House Accounting 

Pros:  

  • Easy Access: An in-house staff will be nearby to answer your questions and provide reports. An outsourced provider may be harder to get ahold of.  
  • Undivided Attention: Your in-house staff will prioritize your needs. An outsourced professional may have various clients making it difficult to provide required services when you need them.  
  • Maintain More Control: Working with an in-house professional allows you to maintain more control over your financial systems.  

Cons 

  • Lack of Experience: An in-house bookkeeper may not be as experienced as an outsourced professional.  
  • Volunteers May Not Be Helpful: If you hire a volunteer, they may not take the job seriously.  
  • More Expensive: According to Icon Systems, the average wage for a nonprofit bookkeeper is $45,860 a year. The hourly cost for a bookkeeper if you’re hiring one part time is an average of $22.59 a year. 

 

When to Consider Outsourcing 

Although outsourcing is not always ideal, there are instances when you may decide it is the best choice. Here are some situations where you may want to bring a third party on board.  

  • Accounting it Taking Too Much Time: You may outsource if accounting is preventing your staff from completing other tasks.  
  • Your Systems Are Inaccurate: If you are struggling to maintain accuracy in your systems, it may be necessary to bring in a professional.  
  • It’s an Affordable Option: If your only choices are to hire a full-time professional or outsource, outsourcing may be the most affordable solution.  
  • Security and Privacy: Your church may not have a secure accounting system. A professional will make security a priority.  
  • Specialized Needs: Church accounting is a specialized skill. You may struggle to find someone who can provide this skill at the price you are willing to pay.  

Choosing the Right Accountant or Bookkeeper 

If you decide hiring an accountant or bookkeeper is the best choice for your business, you must choose someone suited to your needs. Here are some characteristics to look out for.  

  • Specialized Skills: The accountant or bookkeeper should have experience with church accounting.  
  • Services Offered: Bookkeepers and accountants typically offer different services. A bookkeeper may specialize in data entry, reconciliation, and accounts payable and receivable. An accountant will handle financial statement preparation, tax return filing, and budgeting. Ensure you pick the one that provides the service you require.  
  • Technology Proficiency: The employee you choose should be proficient in the systems you use. They may even own tools they use in the bookkeeping process eliminating the need to invest in additional technology.  
  • Customer Service: The person you hire should communicate with you regularly and keep you posted on reporting. They should handle your inquiries promptly.  

 

 

Advanced Topics in Church Bookkeeping  

Church bookkeeping is not exactly simple. The bookkeeper you hire must be able to master the following skills. 

Creating a Tailored Chart of Accounts 

Here are the steps you must take to set up a chart of accounts: 

  1. Identify account categories. These typically include assets, liabilities, equity/net assets, revenue/income, and expenses.  
  2. Determine subcategories: Subcategories will help you get more detailed with your transactions. For example, you may want to divide income into the subcategories of tithes, offerings, and grants.  
  3. Assign Account Numbers: Assign account numbers to each account. This will help with data entry, reporting and analysis, and finding accounts.  

Best Practices for Restricted and Unrestricted Funds 

A church accountant must be careful when keeping records on restricted and unrestricted funds. If you remember, restricted funds are funds designated to specific needs. Unrestricted funds can be used more flexibly.  

The best thing to do is to keep records separate for restricted and unrestricted funds. Doing so will ensure donor compliance and record accuracy. It will also clearly show what funds were used for when reports were created.  

The designation will also maintain transparency with donors allowing them to see how their funds are used.  

Advanced Internal Controls 

Church internal controls are implemented in bookkeeping and accounting to ensure church tax compliance, protect sensitive data, and improve auditing processes. They are mechanisms, procedures and methods overseen by church leaders.  

Organizations may have different internal controls depending on their financial needs and systems. Here are some common ones to consider.  

  • Detective Internal Controls: These controls identify errors so they can be addressed. They include inventory counts, internal and external audits, reconciliations, and surprise cash accounts.  
  • Preventative Internal Controls: These internal controls prevent errors. They include segregation of duties, controlled access to financial systems, double-entry accounting, expense verifications, limiting physical access to cash and other assets, and limiting management involvement in church financial reporting.  
  • Corrective Internal Controls: Corrective controls aim to correct errors and prevent them from reoccurring. They include entry adjustments, physical audits of assets and inventory, ledger verification, employee disciplinary actions, and policy and procedure updates.  

Preparing for Audits 

Audit risk for ministers is not high. Baptist Press estimates the risk is about 1%, the normal percentage for most taxpayers. However, church audit preparation is always recommended. Here are some helpful tips.  

  1. Communicate before the audit date: Communicate with the auditor to find out what information you must present to ensure you are prepared.  
  2. Ensure Records are Accurate: Accurate records will ensure a successful audit. Review your records to ensure they are correct and up to date.  
  3. Document Throughout the Year: Documenting throughout the year ensures you have the records and reports you need when an audit occurs.  
  4. Develop an Audit Timeline: Determine what you must do to prepare for the audit. Assign roles, responsibilities and deadlines to ensure you are ready.  
  5. Perform and Self-Review: If you are facing an external audit, you may want to conduct an internal audit first. Doing so will help you determine problem areas and correct them in advance.  

 

 

Final Thoughts 

Every church needs a reliable bookkeeping and accounting system. It can be difficult to find the right talent given limited budgets, but you can save money by recruiting volunteers, using software and teaching yourself valuable skills. With the right approach, you will develop a financial system that breeds transparency, holds up against audits and helps you budget for the future.  

 

 

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