Accounting

Accounting is simply the process of documenting and recording financial transactions of the business operations —such as income, expenses, assets, or liabilities—and reporting the information in an organized manner. Utilizing accounting can allow a church to track and provide reports as to whether contributions exceeded expenses or vice versa on an annual basis. Accounting also keeps track of the value of all assets that the church may own and any liabilities that the church may owe. Using the accounting formula Assets = Liabilities + Net Assets, a church may be able to find their net worth, or financial value the church has added over the years.

The two main reports that churches, lenders, and governments need to see are Profit and Loss reports and Balance Sheets. When balanced, these reports can help improve the credibility of the ministry when looking to borrow or build, etc.

Profit and Loss

Income – Money received from non-funding purposes such as contributions, donations, offerings, rental income, etc. All income from designated offerings should be properly categorized.

Expenses – Money paid by church for costs it incurs to operate and function. Amounts should match up with carefully documented receipts.

Balance Sheet

Assets – Property that is owned by the church such as land, buildings, vehicles, bank accounts, etc. Most assets require depreciation. It is recommended to consult with a CPA for more information on how to properly categorize your assets.

Liabilities – Financial obligations of the church, such a loan or credit card.

Equity – This is net value of the church after all liabilities.

A proper accounting system always starts with clean “books”, or complete and accurate bookkeeping. The church must be able to maintain a Balance Sheet, or Statement of Financial Position, listing all Assets that belong to the church as well all liabilities the church may have and any equity remaining that is created as a result of positive income over the years.

All contributions that come in physically via offering collection or donation box need to be accurately recorded and documented by designated staff utilizing proper accountability measures such as a minimum of two or three collectors and an independent recorder, with no single individual tasked with reporting and depositing funds. All contributions, including any online or direct contributions, need to be reported on a regular basis.

Expenses should also be documented with corresponding receipts and made within the framework of the approved annual budget. Both contributions and expenses are reported on the Statement of Activities, what is more commonly referred to as the Income Statement. This statement reports the annual activity of the church in income and expense and—most importantly—whether the church experienced a surplus or a deficit of contributions over expenses.

A proper budget is prepared by using financial information from the past years to forecast incoming funds and spending for the upcoming year.

Internal controls are mechanisms that are typically documented in a policy outlining the responsibilities and delegation of duties that are fundamental in maintaining the integrity and security of church finances. Some of these controls include: bank controls that include a required minimum of two signers on any transaction, carefully recorded minutes of church leadership or congregation meetings, delegation of duties including separate individuals being responsible for deposit and reporting, proper authorization and approval, computer and system controls, and accurate financial reporting. Having internal controls such as those briefly mentioned above will help ensure transparency and accountability in matters of church finance. Having proper internal controls also helps identify and prevent any wrongdoing by having independent double checks in areas where money is coming in or leaving the church’s bank. If your church does not have proper internal control methods in place speaking to a CPA or trusted advisor may be a good option to implement necessary controls.