Church and Christian Ministry Financial Management - MinistryCPA

Church and Christian Ministry
Financial
Management

By Corey A.
Pfaffe
, CPA, PhD;
Spring 2012

Accounting Methods


Accrual Basis; GAAP (Generally Accepted
Accounting Principles)


Cash Basis


Modified Cash Basis

Accrual (GAAP)
Balance Sheet

Sample Local Church

December 31, 20xx

Assets

Current Assets


Cash

$17,000


Marketable Securities, at market value

45,000


Receivables

2,000

$64,000

Property, Plant & Equipment


Land & Buildings, at cost

1,250,000


Furniture, Fixtures & Equipment, at cost

200,000


Less Accumulated Depreciation

-
350,000

1,100,000

Total Assets

$1,164,000

Liabilities & Fund Balances

Current Liabilities


Accounts Payable

$12,000


Accrued Liabilities

8,000


Notes Payable

15,000

$35,000

Long
-
term Debt


Mortgage Payable

570,000

Total Liabilities

605,000

Fund Balances


Unrestricted

476,000


Temporarily Restricted

35,000


Permanently Restricted

48,000

559,000

Total Liabilitites & Fund Balances

$1,164,000


Assets


Liabilities, current & long
-
term


Fund Balances, unrestricted
& restricted

Accrued (GAAP)
Statement of
Activity

Sample Local Church

Year Ended December 31, 20xx

Temporarily

Permanently

Unrestricted

Restricted

Restricted

Total

Revenues


Contributions

$780,000

$70,000

$5,000

$855,000


Investment Gains and Losses

6,000

6,000


Investment Income

4,000

4,000


Auxiliary
--
Camp

32,000

32,000


Miscellaneous

4,000

4,000


Released from Restrictions

55,000

-
55,000



0

Total Revenues

881,000

15,000

5,000

901,000

Expenditures


Ministry


Teaching & Preaching

456,000

456,000


Music

52,000

52,000


Youth

62,000

62,000


Occupancy

190,000

190,000


Auxiliary
--
Camp

35,000

35,000


Interest

28,000

28,000


Miscellaneous

12,000





12,000

Total Expenditures

835,000

0

0

835,000

Increase (decrease) in Fund
Balances

46,000

15,000

5,000

66,000

Fund Balances, January 1, 20xx

430,000

20,000

43,000

493,000

Fund Balances, December 31,
20xx

$476,000

$35,000

$48,000

$559,000


Revenues &
Expenditures are
categorized in
columns based on
donor restrictions.


Ending Fund
Balances reported
here must equal
Balance Sheet
amounts.


Expenditures are
reported by Activity.

GAAP Supplementary Information:

Functional Expenses

Sample Local Church

Year Ended December 31, 20xx

Management

Fund
-

Program

& General

Raising

Total

Compensation

$434,000

$89,000

$523,000

Office Expenses

19,000

22,000

41,000

Depreciation

12,000

39,000

51,000

Utilities

5,000

73,000

78,000

Repairs & Maintenance

2,000

31,000

33,000

Interest

28,000

28,000

Miscellaneous

13,000

68,000



81,000

Total Expenditures

$485,000

$350,000

$0

$835,000


Expenditures that
were reported by
activity on the
Statement of
Activities are
recategorized
based on function
(program,
management &
general, or fund
-
raising) and nature.

Cash Basis Balance Sheet

Sample Local Church

December 31, 20xx

Assets

Current Assets


Cash

$17,000


Marketable Securities, at market value

45,000

Total Assets

$62,000

Fund Balances


General Fund

$51,000


Designated Funds

11,000


Endowment Funds

0

Total Fund Balances

$62,000


A portion of the cash and
equivalent
-
to
-
cash resources was
received from donors who
designated the purposes for which
they could be spent. At the end of
December, $11,000 of these gifts
were yet to be disbursed for their
restricted purposes.


$51,000 could be spent for any
purpose authorized by the church
itself since the original donations
were unrestricted.

Cash Basis Report of Receipts &
Disbursements (General Fund)

Sample Local Church

Year Ended December 31, 20xx

Receipts


Contributions

$160,000


Investment
Income, Gains & Losses

4,000


Miscellaneous

2,000

Total Revenues

166,000

Disbursements


Compensation

68,000


Occupancy

34,000


Mortgage Payments

22,000


Capital Expenditures

12,000


Office

19,000


Miscellaneous

3,000

Total Expenditures

158,000

Increase (decrease) in Fund
Balance

8,000

General Fund Balance, January 1, 20xx

43,000

General Fund Balance, December 31, 20xx

$51,000


Unrestricted contributions and
other receipts exceeded
disbursements of these funds by
$8,000 during the year ended
December 31.


Payments on long
-
term debt and
expenditures for long
-
lived assets
(“Capital Expenditures”) are
reported as disbursements.


This reporting format (and the
cash basis) is perhaps the easiest
to understand among the three
choices.

Cash Basis Supplementary Information

Sample Local Church

Supplementary Information
--
Designated Funds

Year Ended December 31, 20xx

Missions

Other

Total

Designated Fund Balances, January 1, 20xx

$4,000

$3,000

$7,000

Receipts

18,000

3,000

21,000

Disbursements

-
16,000

-
1,000

-
17,000

Designated Fund Balances,
December 31
,
20xx

$6,000

$5,000

$11,000

Sample Local Church

Supplementary Information
--
Mortgage Activity

Year Ended December 31, 20xx

Mortgage Balance, January 1, 20xx

$100,000

Principal Payments

$7,000

-
7,000

Interest Payments

$5,000

n/a

Mortgage Balance, December 31, 20xx

$93,000

Accounts Payable
Balance, December 31, 20xx

$1,000


While cash basis
reports are easy to
understand,
supplementary
information should
be provided.

Modified Cash Basis Balance Sheet

Sample Local Church

December 31, 20xx

Assets

Current Assets


Cash

$17,000


Marketable Securities, at market value

$45,000


Accounts Receivable

2,000

Total Assets

$64,000

Liabilities & Fund Balances


Accounts Payable

$1,000

Fund Balances


General Fund

$51,000


Designated Funds

11,000


Endowment Funds

1,000

63,000

Total Fund Balances

$64,000


The modified cash basis omits
long
-
lived assets and long
-
term
debt from the balance sheet,
but includes short
-
term
receivables and payables.


This approach avoids budgeting
challenges and other
shortcomings sometimes
experienced when a strict cash
basis is used.

Modified Cash Basis Report of Receipts &
Disbursements (General Fund)

Sample Local Church

Year Ended December 31, 20xx

Favorable

(Unfavorable)

Actual

Budget

Variances

Receipts


Contributions

$160,000

$155,000

$5,000


Investment Income

4,000

5,000

-
1,000


Miscellaneous

2,000

1,000

1,000

Total Revenues

166,000

161,000

5,000

Disbursements


Compensation

68,000

67,000

-
1,000


Occupancy

34,000

36,000

2,000


Mortgage Payments

22,000

22,000

0


Capital Expenditures

12,000

12,000

0


Office

19,000

20,000

1,000


Miscellaneous

3,000

2,000

-
1,000

Total Expenditures

158,000

159,000

1,000

Increase (decrease) in Fund
Balance

8,000

$2,000

$6,000

General Fund Balance, January 1, 20xx

43,000

General Fund Balance, December 31, 20xx

$51,000


Budgeted
revenues are
“projected”
while most
budgeted
disbursements
are “authorized.”


Variance analysis
can also be made
based on
percentage of
actual to budget.

Modified Cash Basis Chart of Accounts

Cash


Petty Cash


Cash in Bank Checking


Cash in Bank Savings


Cash in Bank CDs

Marketable Securities


Mutual Fund


Public Company Stock

Accounts Receivable
Accounts Payable

Credit Card Payable

Short
-
term Bank Note Payable

Fund Balances


General Fund


Designated Funds


"Faith Promise" Missions


Vehicle Replacement


Camp Scholarships


Benevolence


Endowment Funds


None

Revenues


Contributions


Investment Gains & Losses


Investment Income


Auxiliary
—
Camp


Miscellaneous

Expenditures


Ministry


Teaching & Preaching


Compensation


Office Expenses


Capital Expenditures


Miscellaneous


Music


Compensation


Office Expenses


Capital Expenditures


Miscellaneous


Youth


Compensation


Office Expenses


Capital Expenditures


Miscellaneous


Occupancy


Utilities


Repairs & Maintenance


Auxiliary
—
Camp


Compensation


Office Expenses


Capital Expenditures


Miscellaneous


Payments on LT Debt


Interest


Miscellaneous

Financial Audits


Independent Certified Public Accountant audit


Internal inspection
—
purposes:


To provide accountability for church leaders and staff
as stewards of the resources God has committed to
the church


To secure the confidence of the members in the
reliability of the church financial reports


To maintain credibility of the church as a self
-
policing
organization

The “Audit” Committee


Organization


Reporting

Report of Audit Committee

For Year Ended December 31, 20xx



We have inspected the financial reports and related supporting
records of the church for the year ended December 31, 20xx. The
following procedures were completed:

…


In the course of our inspection we identified several
recommendations that have been communicated to the church
leadership.

Inspection Procedures
—
Illustrated


Compared budget amounts adopted by the church to actual
receipts and disbursements for the year. Investigated major
discrepancies and received satisfactory explanations.


Traced all significant Balance Sheet amounts to appropriate
supporting documents.


Reconciled Fund Balances reported on the previous year’s
Balance Sheet with current year increases and decreases in
Fund Balances and current end
-
of
-
year Fund Balances.


Traced a sample of receipts and disbursements reported on
the Statement of Receipts and Disbursements to
bookkeeping records. Evaluated adequacy of
documentation.

Accounting Software for Churches and
Christian Ministries


QuickBooks
—
Online or Pro (or Peachtree Complete)


Advantages: well
-
known (likely to find members who are
familiar with its use); easy to use; relatively inexpensive


Disadvantages: not a substitute for formal accounting training;
poor internal controls; Not
-
for
-
profit version adds little value


Shelby
(or other church
-
specific
softwares
) (http://www.shelbyinc.com/)


Advantages: specifically designed for church and ministry
applications; valuable supplementary products available in
donor and church management, etc.


Disadvantages: more expensive & complex

Giving Records


Ministries must carefully follow IRS guidelines when
receiving cash and property gifts. IRS Publication 526 can be
helpful.


Software can be very helpful in recording and reporting
donor activity.


Annual reports to donors


$250+ contributions must be specifically acknowledged
(date and amount); otherwise, total contributions can be
reported on annual statements to donors.


Quid Pro Quo Disclosure: “The only benefit provided to
the donor in return for his or her donation was an
intangible

religious benefit.”

Records Retention


Most financial and employment
records should be retained for
up to seven years.


A copy of each year’s annual
report should be kept
indefinitely.


Minutes of official meetings
should be kept indefinitely.

Employment Records and Reporting


Churches and Christian organizations must meet virtually all
of the records and reporting requirements stipulated for
businesses.


W
-
2 / W
-
3


W
-
4 / I
-
9


1099
-
MISC


941 / 944


FUTA / SUTA

Tax
-
exempt Status


The most recognized Internal Revenue Code section in the
not
-
for
-
profit organization world: IRC 501 (c)(3)


Benefits of tax
-
exempt status


Ability to receive contributions that are tax
-
deductible to
donors


Elimination of taxes 1) on profits, 2) on real estate, 3) on
purchases normally subject to sales taxes, and 4) on salaries
and wages that normally require employer
-
paid unemployment
taxes


Application Form 1023


Annual information return Form 990

Internal Controls


Cash receipts
—
“At no time is uncounted money to be in the
possession of only one person.”


Cash disbursements
—
Before a payment is made, a ministry
must assure that the product or service was

1.
purchased by an authorized individual



following an authorized procedure,

2.
received in a useable condition,

3.
priced as previously agreed.


Other controls