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How Accounting Works For Churches

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Contents

Introduction

Effective accounting is vital for churches to manage resources, ensure transparency, and comply with legal obligations. For most churches, single-entry accounting provides a simple and practical way to track income and expenses. This guide offers a comprehensive overview of key terms, processes, and practices relevant to single-entry accounting in a church setting. 

Disclaimer: This guide serves exclusively as a general source of information. It is not meant to provide legal or tax advice. Please consult a professional accountant to ensure the successful implementation of your church’s accounting practices, including any aspects related to any and all use of software.

What Is Church Accounting?

Church accounting is the process of organizing, recording, and planning the financial activities of your church. Since churches are considered nonprofits, the primary focus of church accounting is accountability, not profit.

About Single-Entry Accounting

Single-entry accounting is a system in which financial transactions are recorded once as either income or expense. Unlike double-entry accounting, which records transactions as debits and credits, single-entry focuses on cash flow, making it easier for churches with limited financial complexity to implement.

Accounting Benefits for Churches

Effective accounting helps churches manage income and expenses while ensuring that money is used according to donor intentions. A key method for church accounting is fund accounting, which organizes funds based on their intended purpose and source.

The Importance of Fund Accounting

Fund Accounting is essential in ensuring accountability because it’s the method by which churches allocate income or expenses to specific “Funds”, each dedicated to a particular aspect of the church's mission. 

Churches may create Funds for youth ministry, building, free event organization, etc. A Fund can be created for anything the church requires money for so that people know exactly what they are contributing to when donating.

Fund Accounting fulfills three key roles within the overall accounting process: 

  • It separates revenue and expenses by fund, thus clarifying how money is used.
  • It helps churches track restricted donations (e.g., funds designated for a building project).
  • This system ensures that money is not misused, which could lead to legal issues or a loss of donor trust.

Church Income Streams 

The most common income-earning methods for churches include:

  • Offerings and Tithing: Regular donations from congregants.
  • Pledges: Promises from donors to contribute a specific amount over time.
  • Fundraising Campaigns: Initiatives to raise money for specific purposes.
  • Paid Events: Events where people pay to attend.
  • Capital Campaigns: Larger fundraising efforts for projects requiring more money.
  • Grants: Donations from foundations or other organizations.
  • Investments: Earnings from church-owned investments.

Key Terms in Church Accounting

We recommend exploring our Accounting Terminology guide to learn more, but in the meantime, here's a breakdown of key terms:

  1. Account: A record of all transactions that occur within an organization - both deposits and withdrawals. 
  2. Transaction: An exchange (usually monetary) between your church and another party.
  3. Income: Money received through donations, tithes, offerings, grants, or other revenue streams.
  4. Expense: Money spent on operational costs like salaries, utilities, maintenance, and community programs.
  5. Transfer: A transaction that entails moving money between accounts. 
  6. Category: The purpose of a specific transaction. 
  7. Fund: A purpose to which you may allocate money across accounts (e.g. building). 
  8. Balance Sheet: A summary of financial status showing assets, liabilities, and net worth (optional in single-entry but helpful).
  9. Bank Reconciliation: Matching church records with bank statements to ensure accuracy.
  10. Restricted Funds: Donations or grants designated for specific purposes (e.g., building funds, missionary support). These are usually allocated to dedicated funds.
  11. Unrestricted Funds: Money the church can use for general purposes. This is usually allocated to a General Fund.

Setting Up Church Accounting From Scratch

There are several key steps to follow when you first get started setting up your church accounting:

  1. Choose a System: If you’re using ChMeetings, you’ve already taken this step. 
  2. Open a Dedicated Bank Account: Your church needs its bank account where all its finances can be tracked.
  3. Develop a Recording Process:
    1. Record transactions daily or weekly to avoid backlogs.
    2. Provide as many details as possible on each record. For example, in ChMeetings you can add information such as the date, payee, fund, and category, add notes or memos, or attach documents. 
  4. Configure ChMeetings Accounting: Read Setting Up ChMeetings Accounting for detailed guidance.

Common Processes and Practices in Church Accounting

  1. Recording Income:
    • Log all sources of income with details about the donor (if applicable) and intended purpose.
    • Issue receipts for donations to maintain transparency and assist donors with tax deductions.
  2. Tracking Expenses:
    • Record all expenditures with detailed descriptions and receipts for accountability.
    • Categorize expenses consistently to maintain clarity in reports.
  3. Bank Reconciliation:
    • Compare your records with monthly bank statements.
    • Adjust for discrepancies like bank fees or unrecorded checks.
  4. Monthly Reporting:
    • Summarize income and expenses to provide an overview of financial health.
    • Share these reports with the church’s leadership team, finance committee or congregation, for transparency.

Best Practices for Church Accounting

Use Fund Accounting

Fund accounting is a specialized method for nonprofit organizations like churches. It allows revenue and expenses to be categorized into separate funds.

Fund accounting helps churches adhere to:

  • Financial Accounting Standards Board (FASB) guidelines.
  • IRS requirements for nonprofit organizations in the USA.
  • The creation of accurate budgets and donor reports.

Delegate Accounting Responsibilities

Assigning separate roles for different accounting tasks minimizes errors and risks. Here are some common roles you can think about implementing:

  • Bookkeeper: Oversees day-to-day financial tracking.
  • Accountant: Prepares financial reports, performs reconciliations, files tax forms, etc. 
  • Finance Manager: Oversees all financial activity within your church and can act as an additional layer of accuracy, accountability, and compliance for your records.

Create Budgets

Creating a budget is essential for churches, just like it is for any organization. A well-planned budget allows churches to manage their finances effectively, ensure that resources are allocated to the most important areas, and maintain financial transparency and accountability to their congregation and community.

Reconcile Accounts Monthly

Monthly account reconciliation ensures accuracy and detects discrepancies early.

  • Compare financial records with bank statements.
  • Cross-check donor activity logs against recorded income.
  • Look for errors in data entry, duplicate or unauthorized transactions, or any other financial activity that does not belong in your records.

Maintain Transparency and Accountability

Transparency and accountability are critical to building trust with congregants and meeting legal requirements. Here are some of the best practices you can follow:

  • Provide regular financial reports to church leadership and members.
  • Share progress on Funds and major campaigns.
  • File all necessary tax forms.
  • Ensure that those writing checks are not the same people reconciling accounts to maintain accountability.

Perform Regular Training

Train staff or volunteers in basic bookkeeping to ensure accurate records. Church staff need to be prepared to work with accounting tasks at least as basic as donation recording. This ensures smooth-running operations and more effective donation collection and management.

Consider Your Legal and Compliance Landscape

Some important aspects to consider here include:

  1. Tax-Exempt Status for Churches:
    • Ensure your church is registered as a tax-exempt organization where the law allows or requires it.
    • Maintain records proving that donations and expenses are for religious or charitable purposes.
  2. Donation Receipts:
    • Provide donors with annual contribution statements for tax purposes.
    • Include the church name, donor name, date, and amount of donation on the receipt to ensure at least the basic elements by which transactions may be identified.
  3. Audit Readiness:
    • Keep all receipts, invoices, and bank statements for at least 7 years.
    • Be prepared to show how funds are used in compliance with your tax-exempt purpose.
  4. Fund Use:
    • Track and report Funds separately.
    • Ensure that the money in these Funds is only used for their intended purpose.

Work With Professionals

While general staff or volunteers can manage the basics, at the level of a bookkeeper, you should work with finance professionals for major accounting tasks such as bank reconciliation, reporting, tax filing, or overall financial management. This increases the accuracy of your records, streamlines financial management, reduces risk, and saves a lot of other long-term benefits. Accounting is nothing to take lightly because the health of your church depends on it.

Church Accounting FAQs 

Is fund accounting necessary for churches?

Yes. As nonprofits, churches must use fund accounting to track income and expenses, ensuring compliance with donor intent and financial standards.

Should we hire an accountant or outsource?

It depends a lot on your church size:

  • Smaller churches: You might prefer hiring a freelance accountant or a local accounting firm.
  • Larger churches: Consider employing an in-house accountant to manage complex finances.

What financial statements should churches prepare? 

Churches commonly prepare the following statements:

  • Statement of Activities, showing revenue and expenses.
  • Statement of Financial Position: Provides a snapshot of assets, liabilities, and equity.
  • Statement of Cash Flows: Tracks cash movement within the church.
  • Statement of Functional Expenses: Breaks down spending, for example by Fund.

How can churches ensure financial transparency?

By using fund accounting, churches can allocate income and expenses to specific categories or programs, ensuring that donors’ contributions are used according to the Fund’s stated purpose. Regularly reconciling accounts and separating financial duties also help prevent errors and reduce risks.


 

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