A Quick Guide To Church Accounting

Cassidy Jakovickas, CPA
January 9, 2023

An effective church accounting system is critical for any church organization. An accounting system helps churches manage their finances transparently and responsibly. As a result, churches can make better decisions and have a greater impact on their community.

What is church accounting?

Church accounting is the management of a church's financial resources and processes.  At a basic level, this includes recording income (like donations and tithes) and expenses (like salaries and utilities). This also includes financial statement preparation, bank reconciliations, donation tracking, and task-related tasks.

Key financial statements for churches

Your church's financial statements help you understand your overall financial position and performance. The key financial statements for a church include:

  • Statement of activities: This is also called an income statement or statement of operations. This shows your revenues, expenses, and net income (or loss) over a month, quarter, or year.
  • Statement of financial position: This is also called a balance sheet. This document shows your financial health related to assets, liabilities, and equity.
  • Statement of cash flows: This shows income (tithes, offerings, and donations) and expenses (salaries, utilities, maintenance) for your church. This report also lists income from investment activities, like the purchase or sale of investments. You'll also see financing activities, such as the repayment of loans or the issuance of debt.

Single ledgers vs multiple ledgers in church accounting

Churches use multiple ledgers to track and report financial information in a clear and organized manner. Church funds must be applied toward several different areas and projects. Multiple ledgers let churches organize and classify financial transactions in a systematic way. Separate ledgers may include donations,  fundraising, payroll, employee benefits,  and capital expenditures.

Responsibilities of a church accountant

The duties of a church accountant vary depending on the size and complexity of the church and its financial operations. However, some common responsibilities of a church accountant include:

  1. Maintaining and reconciling financial records: This includes recording income, such as donations and tithes, and expenses, such as salaries and utilities. The accountant may also be responsible for reconciling bank accounts and credit card statements.
  2. Preparing financial statements: This includes generating balance sheets, income statements, and other financial reports that provide information about the church's financial health.
  3. Managing membership records: This may involve tracking membership information, such as contact information and donations, for tax purposes and for the church's records.
  4. Providing financial guidance: The accountant may be responsible for advising the church on financial matters, such as budgeting and investment decisions.
  5. Ensuring compliance with financial regulations: This may include following proper donation receipt procedures, adhering to tax laws and reporting requirements, and implementing financial controls to prevent errors and fraud.
  6. Providing support for audits: The accountant may be involved in preparing for and supporting audits of the church's financial records.
  7. Advising on fundraising strategies: The accountant may be involved in developing and implementing fundraising strategies that are aligned with the church's financial goals.

Tips for setting up a church accounting system

Church accounting can be a daunting task, but it's important to ensure that church money is managed in an organized and legal manner. Church accounting differs from business accounting because church financials are not subject to government taxation, although certain religious organizations may need to file annual informational returns. When setting up church accounting systems, there are several steps to consider.

  • Set up a church budget: Establishing a church budget is an essential part of church accounting. A church budget should consider the church’s income, expenses, and other financial commitments.
  • Appoint a church accountant or bookkeeper to oversee the church's accounts. This is a critical step that ensures you are entrusting your church's finances to a capable and trustworthy person.
  • Establish a system for collecting donations and making payments. This includes steps like using church accounting software and establishing a bank account specifically for church funds. The church treasurer should also set up transaction records to keep track of donations received and expenses incurred.
  • Create policies and procedures for handling church finances. This means establishing protocols for how use of church funds is authorized, as well as how expenses are tracked and recorded. You should also be sure to reviewing your church's financial statements on a regular basis.
  • Stay organized and up-to-date with church accounting records. From recording donations and expenses to tracking any investments made with church funds, regularly reviewing your church's financial performance and accounting processes will keep you on track for success.

Best accounting practices for churches

By following best practices for accounting, a church can better manage its financial resources, comply with regulatory requirements, and maintain transparency and accountability to its stakeholders.

Create an annual budget

An annual budget helps your church manage its financial resources and make informed decisions about its financial management. Here are some steps that your church can follow to create an annual budget:

  • Review the previous year's budget: It's a good idea to start by reviewing the church's previous year's budget to see what worked well and what could be improved upon. This can help identify any trends or patterns in the church's financial activities and inform the development of the new budget.
  • Determine the church's financial goals: The church should consider its overall financial goals for the upcoming year and how they align with its mission and vision. This can help guide the budget planning process and ensure that the budget is aligned with the church's priorities.
  • Estimate income: The church should estimate its expected income for the upcoming year based on its previous year's income and any planned changes. This might include donations, tithes, fundraising activities, and any other sources of income.
  • Identify and estimate expenses: The church should identify and estimate its expected expenses for the upcoming year, including both fixed and variable expenses. Fixed expenses are those that do not change from month to month, such as rent or mortgage payments. Variable expenses are those that can fluctuate, such as utilities or supplies.
  • Compare income and expenses: The church should compare its estimated income and expenses to ensure that its budget is balanced. If the expenses exceed the income, the church may need to make adjustments, such as reducing expenses or increasing income.
  • Review and revise the budget: The church should review and revise the budget as needed based on any changes or unexpected events that may occur during the year. It's a good idea to review the budget regularly, such as quarterly or semi-annually, to ensure that it remains accurate and aligned with the church's financial goals.

Use church accounting software

Here are some traits of a good church accounting software:

  1. Ease of use: A good church accounting software should be easy to use, with a user-friendly interface and clear instructions for performing various tasks. This can help minimize the learning curve and ensure that church staff can quickly and easily perform their duties.
  2. Customization: A good church accounting software should allow users to customize various aspects of the software, such as setting up different categories for income and expenses, creating custom reports, and setting up user permissions. This can help the software meet the specific needs of the church and streamline financial management.
  3. Integration with other tools: A good church accounting software should be able to integrate with other tools that the church uses, such as a database of members or a calendar of events. This can help the church streamline its operations and avoid the need to manually enter data in multiple systems.
  4. Security: A good church accounting software should prioritize security and protect sensitive financial data from unauthorized access. This might include measures such as encryption, two-factor authentication, and regular backups.
  5. Support: A good church accounting software should offer comprehensive support, including documentation, tutorials, and customer service, to help users troubleshoot any issues that may arise.

Craft a fundraising plan

A fundraising plan is a strategic plan that outlines the steps a church will take to raise money for a specific purpose or project. Here are some steps that a church can follow to create a fundraising plan:

  1. Determine the purpose of the fundraising: The church should first identify the purpose of the fundraising and what it hopes to achieve with the funds raised. This could be for a specific project, such as a building renovation, or for general operating expenses.
  2. Set fundraising goals: The church should set specific, measurable, achievable, relevant, and time-bound (SMART) goals for its fundraising efforts. This will help the church track its progress and determine whether it is meeting its fundraising goals.
  3. Identify potential donors: The church should identify potential donors based on their previous giving history, their relationship with the church, and their capacity to give. This can help the church tailor its fundraising efforts and prioritize its outreach efforts.
  4. Determine fundraising methods: The church should determine the most effective methods for raising funds based on its goals, target audience, and resources. This might include traditional methods such as direct mail campaigns or online giving platforms, as well as creative methods such as fundraising events or crowdfunding campaigns.
  5. Create a budget: The church should create a budget for its fundraising efforts, including any costs associated with the fundraising methods it has chosen (e.g., printing costs for direct mail campaigns). This will help the church track its expenses and ensure that it is using its resources effectively.
  6. Implement and track the plan: The church should implement its fundraising plan and track its progress using tools such as fundraising software or a spreadsheet. This will help the church identify any areas that need improvement and make any necessary adjustments to its plan.

File appropriate tax forms

Churches, like other nonprofit organizations, are generally exempt from federal income tax. However, they still have certain tax responsibilities that they must fulfill in order to maintain their tax-exempt status. Here are some of the tax responsibilities of churches:

  1. Filing tax returns: Churches are generally required to file an annual tax return (Form 990) with the Internal Revenue Service (IRS). This form provides information about the church's financial activities, such as its income, expenses, and assets.
  2. Paying employment taxes: If a church has employees, it is responsible for withholding and paying employment taxes, such as Social Security, Medicare, and federal income tax, on their behalf. The church is also responsible for paying unemployment insurance taxes and employee benefit plan taxes.
  3. Reporting unrelated business income: If a church generates income from a trade or business that is not substantially related to its exempt purpose, it may be subject to tax on that income. This is known as unrelated business income (UBI). The church is responsible for reporting any UBI on its tax return and paying any applicable taxes.
  4. Maintaining records: Churches are required to maintain accurate and complete records of their financial transactions and activities in order to support their tax-exempt status. This includes keeping records of donations and fundraising activities, as well as records of expenses and income.

Set up proper internal controls

Internal controls are the procedures and policies that a church puts in place to safeguard its assets, ensure the accuracy and reliability of its financial records, and prevent fraud or errors. Here are some steps that a church can follow to set up internal controls in its accounting:

  1. Assign responsibilities: The church should clearly assign responsibilities for financial tasks to specific individuals or groups within the church. This can help ensure that tasks are completed accurately and timely, and can help prevent fraud or errors.
  2. Establish separation of duties: The church should establish separation of duties for critical financial tasks, such as authorizing transactions, recording transactions, and reconciling bank statements. This can help prevent errors or fraud by ensuring that no single individual has complete control over a financial process.
  3. Implement control procedures: The church should implement control procedures, such as requiring dual signatures on checks or establishing approval levels for financial transactions, to ensure that financial activities are properly authorized and monitored.
  4. Use technology to enhance controls: The church can use technology, such as accounting software or digital signatures, to enhance its internal controls and make financial processes more efficient and secure.
  5. Regularly review and update controls: The church should regularly review and update its internal controls to ensure that they are effective and aligned with the church's needs. This might include performing audits or risk assessments to identify any weaknesses in the controls.

Image Credit: Josh Eckstein

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