This post was last updated on March 25th, 2021 at 03:07 pm.
Let’s first say, church bookkeeping is not just keeping a checkbook register. If this describes your current church, please keep reading. There are many reasons why just having a checkbook register is inadequate. We will get into that later.
Having accurate church bookkeeping practices, as well as, the right people in place is very important. One of the top five concerns churches should address early on is their bookkeeping systems. There are multiple approaches to handling this the right way.
Handling the bookkeeping for the church can be done internally by a hired staff or a volunteer. It can also be handled externally, by a bookkeeping service like Icon Systems. In either case, the church must know the person doing the bookkeeping is knowledgeable, trustworthy, and ensures all accounting principles are followed.
Having Financial Statements
One of the most important things missing when using only a checkbook register is reports. A church can’t produce financial statements such as balance sheets or profit & loss reports. A checkbook register does not give information on balance sheet accounts. For instance, property owned by the church, how much the church owes in debt, or accounts receivables.
Financial statements are more difficult for churches because they must provide these by fund. For example, they need to be able to produce a General Fund Balance sheet, a Youth Fund Balance Sheet, and a Mission Fund Balance sheet separately. Additionally, the balance sheet reports must have the ability to be combined. Having only a checkbook register fails in all of these areas.
Why are Financial Statements Important
There are so many reasons financial statements are needed and why it’s in the best interest of the church to have them. Thus they need to have the right bookkeeping processes in place to produce these reports and others as needed. Keeping a checkbook register just doesn’t cut it.
First, nonprofits are required to have these reports no matter the organization’s size. Churches get audited by the IRS and others routinely. The church does not want to wait until the audit letter arrives to start pulling data together to produce reports. That’s like coming out with a game plan after the game is over.
Second, what happens when the church wants to borrow money for anything from a small balance credit card to a huge expansion project. The first thing the banks will ask for is the organization’s financial statements. Worse yet, they will want to see these financial statements for the past 3-5 years. Year closing statements could also be required.
But the most important reason the church needs financial statements is so they can make good decisions about the direction of the organization. Financial statements should not be looked at as a thorn in the church’s side. The reports are there to help church leadership make good, informed financial decisions.
Using Only A Checkbook Register For The Church
A Bad Idea
Having only a checkbook register for the church’s accounting is not a good plan for the church. Not only is the information on revenue and expenses accounts limited, but liabilities and tax withholdings are completely missing, which leads to one of the biggest and costly mistakes a church can make.
One of the easiest (and worst) mistakes to make is paying someone for services when they are not classified correctly. For example, classifying them as a contractor (1099 contractor) instead of an employee. It is so much easier to pay with a check and not worry about withholding taxes than to classify the person as an employee, but make sure it’s legal. See what the IRS says about figuring out if the person is a 1099 contractor or W2 employee, click here.
The reason this is a big mistake is the IRS will fine and penalize the organization, and possibly the worker. Next, the IRS will want all the back taxes that should have been paid. This is just the financial fallout. What about the damage to the church’s reputation in the community?
Church Bookkeeping and Funds
Churches must use fund accounting to follow FASB Topic 958. What do funds have to do with church bookkeeping?
The checkbook is essentially broken into many mini checkbooks by the accounting funds the church uses. Churches use funds to break up their resources into mission areas. This allows the church to understand how each mission is doing. For example, which missions are successful, which ones need help, how money is spent for each mission, and how much is being donated for that particular mission.
If using one checkbook register how would the church keep the money separated for each fund? This would be very difficult without having a subsidiary spreadsheet or another method breaking the checkbook into funds. This is yet another reason a church using only a checkbook register fails to report their numbers correctly or just can’t break the numbers out at all.
The old checkbook workaround
Years ago, if churches had 5 funds, they would go to the bank and open 5 different checking accounts. At times, these 5 different accounts were located at different banks making deposits and transfers between accounts difficult and time-consuming. However, this workaround was one way to side-step the “fund” issue prior to proper fund accounting software.
This multiple checkbook issue to keep funds separate was a problem in many ways and why ‘fund accounting’ was created. One of the issues was reconciling five checkbooks each month. That would be an insane amount of work. Fund accounting solved this by keeping one checkbook but allows separate balances within it for each fund. Think of these separate balances as mini checkbooks.
Church bookkeeping must keep all this straight in the checkbook register and other general ledger accounts. This is why having only a checkbook register for the church’s accounting is a poor choice. The old way needed to be changed to help churches keep their books straight and provide the information needed for the church. Fund accounting was the answer.
Knowing the Balance of Restricted and Unrestricted Funds
Bookkeeping is more than just entering numbers in a checkbook register. Checkbook registers only record the ‘in’ and ‘out’ of the account. Checkbook registers do not record the ancillary information that is needed to provide reporting to the church and their missions. Only using checkbook registers for church bookkeeping, simply put, comes up short for churches.
When fund accounting is used in the bookkeeping process, the ancillary information for the fund and its restriction status is intact. Fund accounting helps the bookkeeping process by returning better data for the church’s decision-making process.
Church Bookkeeping Summary
Church bookkeeping has come a long way allowing churches to make better decisions about how they should use their resources in a better way. Technology has ushered in better ways to track money via accounting funds, instead of using five different checkbooks. Technology helps churches stay away from using spreadsheets to track their funds.
Bookkeeping based on fund accounting principles can show churches which missions are doing well, and other missions that might need help. Think of bookkeeping as the process of recording the entries into a system. That data system is governed by fund accounting principles.
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I never knew that checkbook information is important for balancing financial status. My cousin mentioned that he is looking for a dependable service that can help them with their church’s financial reporting, and he asked if I had any suggestions. Thank you for the information; I’ll be sure to advise him that virtual church bookkeeping services can assist them with any questions they may have.