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
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