On a regular basis, we hear from prospective software-purchasing churches who are leaving their business accounting packages in search of software designed specifically for churches. Conveniently, we offer one! But admittedly, we are not the only ones and there are definitely many different flavors of software ranging from on-board installation to web solutions to cloud products. While standard for-profit business software can be used to track church finances, many agree that fund accounting is the best way to track ear-marked monies as a church has the responsibility to do.
When members donate to the church for a specific purpose, it is the fiduciary responsibility of the church to keep track of these separate proverbial buckets of money. Each bucket of money, or stated purpose, is known as a fund. In addition to these stated-purpose funds where money is designated for a singular use, the church will always have “the big bucket.” This is the general fund, operating fund, or slush fund. The general fund likely receives the majority of general “in the Sunday morning plate” giving for ongoing current church expenses. The general fund is also the fund from which expenditures are made for general operations such as electricity and staff salaries.
Though readily-available business software packages could be configured to track the church income and expenses, the uniqueness of restricted use and non-restricted use funds make fund accounting software packages the better solution to track church finances. And to convey the complete fiscal picture to church committees or to denominational governing bodies, there are multiple reports one should provide.
The heart of fund accounting is a report which tracks each separate grouping or purpose of money (each fund) and paints a picture for the reporting period selected, often monthly. This report conveys a fund’s starting balance for the period, then adds any income, subtracts expenses, and then notes any adjustments. Through this process, a committee can see (in business terms) the inflows then the outflows in order to then see an ending position for the period.
It is also appropriate to provide a statement of financial position, also known as a balance sheet. Whereas a business balance sheet would operate via the equation Assets = Liabilities + Owner’s Equity, non-profit organizations do not technically have owners. So the church balance sheet is stated as Assets = Liabilities + Fund Balances. That last part is to say, “The sum of all fund balances.” Some churches do wish to track the value of fixed assets as part of the balance sheet. This is fine to do but, of course, there must be a liability or a fund balance dollar for each asset dollar in order for the equation to balance. So a church that tracks fixed assets will often have a fixed asset or an equity fund balance.
A business will also report its profits and losses to its shareholders. In church terms, a statement of income and expenses acts as its equivalent. This report usually incorporates any type of budgeting that the church may do. So at a glance, committees can see money is coming in as expected. Similarly, the expense side of this report can be an indicator of expenses running ahead or behind pace for a particular point in the church financial year. Not all budgets need to be a standard sum total split into twelve equal parts (one part for each month of the year.) Heating and cooling costs are examples of costs that would likely be higher at certain points during the year, and lower at others. Summertime cooling costs and wintertime heating costs, depending on the church location of course, are likely to require a higher proportion of budget.
While some committees may request additional reports such as a check register, transaction journal, or cash activity report, the majority will be happy with the trifecta discussed earlier: fund activity report, balance sheet, and income/expense/budget report.