named tithes, missions, or love offering. The church may have other designated offerings, such as building fund or parking lot fund. If the money is intended for a specific purpose, the business office must ensure the money goes into that bucket. Label the buckets clearly because when the buckets are lined up, at a certain angle, buckets all look alike.
You must also define which bucket the money comes out of when money is spent (or committed). Church members need to be kept informed that their tithes are what pays the operating bills, electricity, water, salaries; the normal monthly expenses. Operating expenses should not be paid from any other source. However, if a particular church decides to pay operating expenses from a different source, such as interest on investments or donations for that purpose, be consistent and manage the funds openly.
The following diagram will help explain how to decide the correct way to characterize the funds. The church accounting software will channel entries to the right account providing it is set up correctly.
FIGURE 4-1 ACCOUNTING T-ACCOUNTS
If members designate all their giving to specific purposes, the business manager has no leeway to pay operating bills. Giving to specific purposes should always be done after tithes are given. Each member’s record of giving shows how the money is apportioned, whether it all went to tithe or spread out in a designated way. Members who designate all their giving into specific projects (or Missions, for example) may be hurting the church with their good intentions.
A periodic report to the congregation through the business meeting would show how giving was made, how much went into each category: general fund, missions undesignated, missions designated (to a specific mission or missionary), or a special project. They should know how the money was spent, and how much was saved back for the rainy day. It will not of course show the contributor’s name and amount.
Chart of Accounts (COA). (Attachment 4-1, example of COA) This may be a new term for ministerial candidates. It is the list of line item names for the separate categories of money or assets (names of buckets). Each line item is an “account” within the COA. They exist only within the accounting program and are not separate bank accounts. These accounts are used for both the income statement and the balance sheet. Each will be discussed later. The business manager sets up the COA before the beginning of the fiscal year. Setting this up is central to ensuring entries are either debited or credited to the correct account. Accomplish this in conjunction with members of the finance committee or the planning committee. When the bookkeeper (or business manager) sets up the accounts in your accounting software program for the coming year (they should do this well before the beginning of the fiscal year), they will follow the COA.
The COA can be updated during the year (add or change accounts). It is the basis for various reports, primarily the income statement and balance sheet.
Most churches are set up on a “cash” basis rather than an accrual basis because:
1.They do not have inventory for sale;
2. Receipts (tithes and offerings) are received immediately (an invoice is not issued, for eventual payment).
Some churches however use a pledge method of gauging future income. The business manager can track seasonality, and the resulting estimate should be a good forecast, especially in an established church.
There is no conflict for the church accounting to be set up on a cash basis and still have a line of credit with vendors. This is the normal method of business transactions for goods and services. The church’s purchase order is entered for the goods or services; after the purchase, enter the vendor’s invoice in the accounting system when you receive it. The date payment is due is set by the vendor with the terms of payment as agreed when the line of credit was established. But if there is no payment date, then the church sets a due date for the invoice to be paid within 30 days from the invoice date.
The COA complexity depends on the complexity of the church organization and the number of different programs or activities sponsored by the church. Two documents use the COA: the income statement and the balance sheet. The COA should be set with sufficient detail to account for the various sources and designations of income such as tithes, building fund, missions, so on. It should likewise be detailed enough to show all expense items in their proper category. There normally are more expense items, or accounts, than income accounts. An example is salaries, utilities (electricity), utilities (water), janitor service, missions, office supply, and so on.
While churches are not required to pay tax on property or income, there may be voluntary services that are provided by the community which are much like a subscription account. The service is provided to subscribers who pay into the voluntary service. This could be emergency fire service, flood control. It is not required, the church does not have to pay the subscription fees, but the church will not receive the benefit of the services if they do not.
Income Statement – This is often called the P&L statement, or profit and loss. For a church, there should not be any loss, but there often is. The income statement records two types of entries: income and expense. When all expense is deducted from income, the remainder is net income (net profit for a business). The income statement encompasses a period, such as year to date or this month.
Balance Sheet – This is the oldest form of financial instrument, originated in antiquity and up until the last century used to determine profitability. This is also known as the statement of financial position. See Figure 4-2 for a balance sheet example for a church. This shows the financial strength of the organization, whether a church or a business. The balance sheet has two main sections: assets and liabilities. The balance sheet is often called a financial snapshot because it shows the net financial worth of an organization as of a specific date.
Church leaders should be completely familiar with this document. It should be reviewed every month by the leadership, then presented to the congregation. The Accounting Associate will pull the numbers from the applicable accounts for entry. A graph should be prepared monthly showing the trend for the church. One does not have to be expert in accounting to follow the trend line on a graph.
The section showing current assets lists all assets that can be converted to cash within a thirty-day period. It is conceivable that the church can be owed money, for the sale of property, or equipment. The sale of products which are invoiced could be listed as accounts receivable, but the type product should be one that is clearly associated with the mission of the church. Otherwise, it would likely be considered a commercial product, requiring it be accounted or separately apart from the church accounting.
Likewise, stocks, bonds or treasury notes are commercial investments that normally will not be mixed with the accounting of tithes and offerings of the church membership. Church leaders should be knowledgeable of liabilities, both current and long term.
Figure 4-2 Balance Sheet Example (without numbers)
Finance
Financial management skill is used to evaluate projects to obtain the best result among various choices. These skills are used to get the most value from each dollar, and to seek alternatives to cash outlays. It is here that theory and reality can have a head-on collision. What creates financial health for a church: accountability and transparency?
In theory, if it makes people feel good, is sponsored by the church, helps people, so it must be spiritual; then it must be worthwhile, and if it is all that, God will provide. I am not speaking for God in this matter. I can only point to many such endeavors that failed and one must wonder was God in it, did He withdraw his support, or did someone misread? Let’s go back to finance, so we can learn to use financial tools, and you are still encouraged to keep God in it.
Cash Management – Cash on hand (in the bank, of course) is required for transacting business even though bills are usually paid with a check (paper, or digitally) or a credit card (which