Fund accounting is a specialized system that tracks money based on its intended purpose. It ensures accuracy and financial transparency in religious institutions. Churches and nonprofits must utilize this system to align with compliance regulations.
Fund accounting for churches requires a learning curve. This article provides the basics so you can understand its importance in a nonprofit setting.
Table of Contents
- What is fund accounting and why is it important for churches?
- How do I set up a fund accounting system for my church?
- What are the different types of funds in church accounting?
- How can fund accounting help improve financial transparency in churches?
- What are some best practices for church fund accounting?
- How can fund accounting help churches meet legal and regulatory requirements?
- Where can I find help and resources for church fund accounting?
- Get Free Church Finance Templates
What is Fund Accounting and Why Is it Important for Churches?
This section will dig into fund accounting and explain its importance. Fund accounting is the primary method churches and nonprofits use to ensure money is used for its expressed purpose when a donor gives to an organization. Its importance extends into many areas of a church’s finances. When you send a donor acknowledgement letter and include tangible proof that their gift was used as intended, it makes them more likely to give again.
Understanding the Basics of Fund Accounting
Fund accounting differs from traditional accounting because it involves organizing systems based on funds. Each transaction is assigned the most suitable fund.
Funds are typically categorized into three categories as follows:
- Operating Fund: This fund covers day-to-day operations, including payroll, rent and utilities. Unrestricted donations may also be included.
- Restricted Fund: Restricted fund allocation ensures money is used for a specific purpose or within a limited time frame. The funds may be set aside for a program or project.
- Endowed Fund: Endowed funds are reserved in that they must be preserved in perpetuity. However, the income generated from the funds can be invested in various projects. Restrictions may apply concerning whether endowment earnings can be spent. The goal is to maintain the principal amount.
Fund accounting for churches is necessary because it upholds transparency and accountability. Donors can ensure their donations are used for the intended purpose. The system upholds faith in the church, establishing it as a trusted community organization.
The system also:
- Separates Funds by Purpose: Segregating funds ensures that organizations maintain accurate records and that transactions are easy to track. It also helps organizations remain compliant with financial laws and regulatory requirements.
- Establishes Strong Internal Controls: The Association of Certified Fraud Examiners notes that charitable and religious organizations report a median loss of $85,000 due to fraud. Accurate record-keeping reduces the risk of fraud, enhancing stakeholder confidence. It also allows organizations to maintain strong internal controls by recording operational procedures and supporting task delegation, separation of duties and regular audits.
- Ensures Accurate Record Keeping: Fund accounting ensures all entries are documented and categorized correctly. It also provides insight into the organization’s financials to guide informed decision-making.
- Adopts Consistent Recording Standards: Fund accounting for churches allows organizations to adhere to consistent reporting standards such as the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS). Consistency in reporting allows stakeholders to assess the organization’s health and ensures regulatory compliance.
How Fund Accounting Differs from Traditional Accounting Methods
Fund accounting differs from traditional accounting in the following ways:
- Works with Restrictions: Commercial organizations do not have restricted funds. Money can be redirected at any time. The restricted funds of nonprofit accounting do not allow fund transfers, ensuring money is used for its intended purpose.
- Focuses on Tracking and Managing: Fund accounting focuses on tracking and managing money, whereas traditional accounting measures a company’s financial performance.
- Separation of Financial Resources: Fund accounting separates transactions into distinct funds so statements can be created for each fund. Traditional accounting combines all resources in a single statement so companies can determine overall growth.
- Focus on Transparency and Accountability: A primary goal of fund accounting for churches is to promote transparency and accountability among stakeholders. Businesses focus on profit maximization and shareholder value.
The Benefits of Fund Accounting for Churches and Nonprofits
Fund accounting offers the following benefits:
- Improves Trust with Donors: Donors can review statements to ensure their money is being used for its intended purpose. The system builds trust with the organization.
- Improved Faith-Based Financial Stewardship and Resource Allocation: Fund accounting ensures finances are handled ethically. It also provides oversight so organizations can determine optimal resource allocation.
- Enhanced Clarity in Financial Statements and Decision-Making: Fund accounting allows organizations to create financial statements that clearly show how funds are used and the amount of money in each account. They can use this information to make the best financial decisions.
How Do I Set Up a Fund Accounting System for My Church?
Churches must first set up a fund accounting system that meets their organization’s needs. Here’s what’s involved.
Establishing a Chart of Accounts for Church Fund Accounting
The first step involves setting up a chart of accounts for nonprofits. This guide will establish the necessary process. In this first step, you’ll need to begin by identifying the account categories within your chart of accounts.
Identify Account Categories
Typical account categories include:
- Assets: The assets the church owns, including cash, equipment and buildings
- Liabilities: What the church owes in loans
- Revenue and Income: Sources of income including tithes, offerings, donations and grants
- Expenses: Church expenses typically include payroll, mortgage, utilities and ministry expenses
Determine Subcategories
The church may set up subcategories to better organize its financial system. For example, income may be divided into tithes, offerings and grants.
Assign Account Numbers
Typical account numbers are as follows:
- 1000-1999 for Assets
- 2000-2999 for Liabilities
- 3000-3999 for Equity/Net Assets
- 4000-4999 for Revenue
- 5000-5999 for Expenses
Numbers are further assigned based on subcategories. For example, an interest expense maybe 5000 — a rent expense may be 5010 and so on.
This video provides more insight into setting up a chart of accounts for churches.
Choosing the Right Fund Accounting Software for Your Church
Fund accounting software isn’t mandatory, but it does make accounting easier. It also helps ensure compliance. A GM Insights Report reveals the fund accounting software market is estimated to register a CAGR of 6 percent between 2024 and 2032 as organizations meet growing pressure to remain compliant.
Here are some recommended nonprofit accounting software solutions.
- ACS Technologies: ACS Technologies offers personalized services that can be customized to your ministry’s needs. It provides fund accounting software that can help you plan your budget. It also offers church management, giving tools, engagement-boosting solutions and community analytics.
- Powerchurch: Powerchurch offers comprehensive administrative church services. It allows you to maintain membership, accounting, contributions, event scheduling and record-keeping in one system. It’s affordably priced, making it ideal for ministry budgets.
- Church Windows: This church management software provides an intuitive system that limits complexities. It assists with membership, scheduling, donations, accounting and payroll. The system can be customized to suit your church's needs.
- Concordia: Concordia offers an online system you can use from anywhere. Its suite of features supports optimal organizational needs. Church 360 Ledger will handle your church’s accounting duties.
- Planning Center: The Planning Center offers comprehensive fund management. You can set up funds for different budgets so donors can designate their donations. It also provides a giving platform that ensures easy trackability.
- QuickBooks: QuickBooks is one of the most popular accounting software systems. However, it’s not optimized for fund accounting. Organizations that use the system must invest in expensive upgrades to access the required systems.
Donor management systems can be integrated with automated tools like email marketing programs, payment processing systems and accounting software to support a streamlined process. All the tools mentioned above will combine effortlessly with the Vanco platform, ensuring a seamless approach.
This video provides more insight into choosing the best nonprofit accounting software.
Implementing Fund Accounting Principles in Your Church’s Financial Management
Organizations must implement fund accounting principles to ensure church bookkeeping standards are accurate and compliant and uphold optimal transparency. These practices provide an ethical approach.
- Instituting Internal Controls and Auditing Procedures: Internal controls in faith-based organizations require separating duties so employees handle different aspects of the account, reconcile regularly and document all transactions. They also mean limiting access based on roles, performing risk assessments, standardizing systems and communicating policies and procedures to all staff members. Systems should be audited regularly to ensure accuracy and compliance and to detect errors before they lead to more significant issues.
- Training Staff and Volunteers on Fund Accounting Basics: Staff members and volunteers should be trained on software systems and understand fund accounting basics to ensure an ethical and compliant accounting process.
- Ensuring Ongoing Professional Guidance and Compliance Monitoring: Churches may consult a professional accountant or bookkeeper to ensure their systems are accurate and compliant.
What are the Different Types of Funds in Church Accounting?
Financial administrators must understand the different types of funds in church accounting. They are generally categorized as follows:
Understanding General Funds vs. Restricted Funds
- Permanently restricted net assets are designated to a specific cause, such as a project or program.
- Unrestricted fund accounting means funds have more flexibility and may be used for various purposes.
- Temporarily restricted net assets may be designated for a specific purpose in the future.
This video further explains the difference between restricted and unrestricted funds:
Funds can also be categorized as donor-designated funds or endowments.
- Donor-designated funds are donated by a donor to be used for a particular purpose.
- Endowments refer to money invested to provide a steady income for the church. The income is typically used for a specific purpose. The goal is to maintain the principle so it doesn’t fall below the original donation amount.
Managing Building Funds and Special Project Funds
Funds may also be classified following their project designation. For example, you may make separate funds for building projects and special programs.
Financial administrators should allocate funds to record them in the proper campaign. They should also use the account to track facility maintenance and expansion costs. They can run a report to get an overview of how much is spent compared to how much is donated.
Tracking and Reporting on Multiple Funds
Fund accounting for churches also allows administrators to gain an overall view of their finances through tracking and reporting. For example, they may:
- Balance Reports: Fund balance reporting tracks specific accounts or all accounts within a timeframe. It helps you understand the organization's performance, track its financials, prepare church financial statements and reconcile accounts.
- Assign Expenses and Revenue to the Correct Fund: All transactions must be assigned to the correct fund to ensure accurate bookkeeping.
- Ensure Timely Financial Statements: These practices will ensure accurate financial statements that can be made available to stakeholders monthly, quarterly or annually.
How Can Fund Accounting Help Improve Financial Transparency in Churches?
Here are some ways fund accounting supports transparency:
Using Fund Accounting to Generate Clear Financial Statements
- Clear Financial Statements Promote Transparency: Fund accounting allows you to generate financial statements showing how funds are spent. A Root Cause study on the psychology of donor motivation shows donors are 75 percent more likely to give when there is concrete information about the organization’s achievements.
- Produces Statements of Activities, Financial Position and Fund Balances: A statement of activity shows the organization’s revenue and expenses over a specific timeframe. It reveals financial position and fund balances.
- Highlighting Restricted vs. Unrestricted Funds in Reporting: Reports will show how money is distributed among restricted and unrestricted funds, ensuring donors see precisely how their funds are utilized.
Demonstrating Stewardship Through Proper Fund Allocation
Fund accounting lets donors see that their gifts are used according to their wishes, keeping with biblical principles of good stewardship by your church. They can also understand how their funds impact ministry outcome. A positive impact can inspire them to continue giving. According to Neon One, 97 percent of donors cite impact as a significant motivator.
Proper fund allocation demonstrates stewardship and ethical responsibility, fostering trust and transparency.
Enhancing Donor Confidence with Accurate Fund Reporting
Churches can further enhance donor confidence with regular financial updates and annual reports. They may publish newsletters sharing how campaign efforts helped the organization achieve specific goals. They should also release stakeholder reports annually.
Accurate fund reporting also increases accountability by church leadership, trustees and denominational bodies. Leaders understand they must provide statements that back their activities, making them more accountable for their actions.
What are Some Best Practices for Church Fund Accounting?
The following best practices will ensure high transparency in church fund accounting.
Maintaining Separate Bank Accounts for Different Funds
- Prevent Commingling Restricted and Unrestricted Assets: Separate bank accounts will ensure money does not commingle and it supports optimal organization. Churches should prioritize separating restricted and unrestricted funds for optimal transparency.
- Improving Financial Clarity and Reducing Errors: Separating accounts also improves financial clarity, making it easier to keep track of how much is deposited and withdrawn. It also reduces the risk of errors that may occur if finances are combined.
Regularly Reconciling Fund Balances and Financial Positions
- Conducting Monthly or Quarterly Reconciliations: Accounts should be reconciled regularly to ensure internal systems match external systems. This process leads to accurate accounting and ensures errors are caught early on so you can fix them before they grow into larger issues.
- Implementing Checks and Balances for Ongoing Accuracy: Checks and balances ensure no individual has complete control over financial accounting by dividing up roles and responsibilities. This helps prevent fraud and theft.
Implementing Internal Controls for Fund Management
- Establishing Approval Processes for Fund Usage: Checks and balances are further integrated when approval processes for fund usage are established. They ensure multiple parties approve spending, supporting better decision-making and preventing irresponsible or unethical spending.
- Utilizing Church Audit Committees or External Auditors for Oversight: Internal audits, such as finance committees, ensure trustees' financial oversight. These processes evaluate risk management, improve controls, make systems more efficient, detect fraud and support reporting. Organizations may audit their own systems or hire external auditors for advanced oversight
How Can Fund Accounting Help Churches Meet Legal and Regulatory Compliance?
Fund accounting also ensures churches meet legal and regulatory compliance requirements. Here are some examples.
- Adhering to FASB and GAAP Guidelines for Nonprofit Financial Reporting: Churches often adhere to Financial Accounting Standards Board (FASB) and Generally Accepted Accounting Principles (GAAP) standards. FASB standards ensure the church adheres to fund accounting, reconciles accounts, classifies assets and manages liquid assets responsibly. Nonprofit GAAP compliance ensures consistency, sincerity and non-compensation of debts and expenses with assets and revenue.
- Understanding Denominational Reporting Requirements: Denominational financial reporting provides information concerning membership numbers, activities, leadership, doctrinal standings and other aspects of religious groups. It ensures financial statements are categorized based on specific denominations or funds within the organization, supporting optimal transparency and accountability.
Preparing for Audits with Proper Fund Accounting Documentation
- Maintaining Detailed Records for Each Fund: Audits will be more successful and cause fewer headaches with proper documentation. Organizations may present receipts, tax returns, invoices, contracts and various statements to promote optimal transparency in the auditing process.
- Providing Auditors with Transparent and Verifiable Records: Proper documentation and verifiable records align with nonprofit audit guidelines. They ensure the audit is conducted according to professional guidelines, offering more transparent, accurate results.
Meeting IRS Reporting Requirements for Churches
Churches are not required to pay federal or state taxes. However, they must still file a yearly tax return to comply with federal requirements. Here are some other IRS compliance regulations to consider.
- IRS Form 990 Filing: Most churches and tax-exempt organizations must file Form 990 (Return of Organization Exempt from Income Tax). Different types of 990 Forms exist, including the simplified 990EZ and the 990-N, a postcard sufficient for organizations not required to file 990. Talk to an accountant to determine which suits your organization’s needs.
- Tax-Exempt Status Compliance: Churches may also be required to provide documentation qualifying them to maintain tax-exempt status. To remain tax-exempt, they must not conduct political campaigns that interfere with public office elections, such as lobbying.
- Other Tax Forms: Churches may be required to file state tax reports.
Where Can I Find Help and Resources for Church Fund Accounting?
Church fund accounting can be complex and many churches don’t have the budget to hire professionals. However, several inexpensive resources can help them maintain an organized system. Here are some to consider.
- Working with CPAs Experienced in Nonprofit and Church Accounting: A CPA can help churches set up financial systems, provide management guidance and complete tax forms. Though expensive, services may only be required a few times a year. Additionally, some sources say accounting services save churches money and time and can be less costly than a paid employee. For example, according to QuickBooks, a full-time bookkeeper earns about $47,000 a year, while accounting services for small organizations typically cost between $1,000 and $5,000.
- Engaging Financial Advisors for Strategic Fund Management: A financial advisor can develop spending and investment strategies, ensuring churches spend their money wisely. They can help organizations make the most of endowment funds and other investments. Responsible endowment fund management builds both financial stability for churches and trust with donors.
Training and Educational Resources for Church Accounting Staff
Churches must train and educate staff, ensuring they know how to use their financial technology and are updated on the latest compliance regulations. Here are some effective training methods.
- Utilizing Online Courses, Webinars and Workshops: Online courses, webinars and workshops offer cost-effective training. Administrators can scour YouTube and other channels for educational videos or research organizations offering courses and webinars. Nonprofit financial management software providers may also provide free or low-cost resources.
- Investing in Staff Development and Continuous Education: Churches may also invest in staff development and continuous education by inviting an expert into the office. It’s an investment that pays off, ensuring staff members sharpen their skills and are current on the latest compliance regulations.
Online Communities and Forums for Church Management
Online communities and forums don’t always provide accurate information, but they are good venues for sharing ideas and may provide valuable resources. Here are some to consider.
- Joining Faith-Based Leadership Alliances: Reliable faith-based leadership alliances include the Evangelical Free Church of America (EFCA), which aims to connect members of churches, ministries and staff so they can share ideas. The Christian Leadership Alliance convenes and trains Christian nonprofits to ensure they maintain stewardship within their ministry.
- Networking with Other Churches for Shared Best Practices and Recommendations: While organizations like the EFCA can connect you with other religious organizations, you can also network with other churches and learn about their accounting best practices and recommendations.
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