Fund Accounting Methods Compared.

This post was last updated on March 30th, 2021 at 03:53 pm.

Accounting for churches is radically different than accounting for for-profit businesses, or at least it should be. The Financial Accounting Standards Board (FASB: http://www.fasb.org) has defined how accounting for a nonprofit organization differs from a for-profit organization. Icon Systems has gone to great lengths in designing IconCMO to follow these guidelines in order to be compliant with all government regulations. Following these guidelines also provides churches the reports they need to effectively manage their organization. We’ll try and define some of the methods companies are using today and their benefits and faults. Before we do so, we need to change some of the terminology.

o        Income Statement is defined as Statement of Activities

o        Balance Sheet is defined as Statement of Financial Position

o        Owner’s Equity changes to Net Assets

o        Income accounts are defined as Revenue accounts.

After reviewing different church accounting software systems some common practices have arisen.

Use Revenues and Expenses to track your Funds.

When using this method and you want to start a Capital Campaign drive, it would involve creating a Capital Campaign Revenue account and a Capital Campaign Expense account. While at first this seems like a good method you quickly realize that a single revenue/expense account on each side will not help the church board understand where the money was raised or how it was spent.  This method creates headaches for the accountant that now needs a complete set of accounts defined for each fund which creates a bloated chart of accounts.

Use Liabilities to track your Funds

This involves adding a liability account for each fund that you manage. If the church has received “X” dollars that is earmarked for Hunger Relief, the money would go into the Hunger Relief liability. Once entered it is easy to see how much money is owed to the hunger relief. When money is spent against this fund, the Hunger Relief liability is reduced until it returns to zero. Unfortunately at the end of the year the church board doesn’t know how much revenue was generated for the hunger relief fund or what expenses were incurred by it. While these hurdles could be overcome with some manipulation in the revenue and expense accounts it would be difficult/impossible to view a Statement of Activities and know why money was spent on specific items.

Additionally, a General Fund that is defined as a liability account would appear to the church board as money owed. Incorrectly defining funds as liabilities will not provide an accurate Statement of Financial Position. Without the ability to see what the true balance is, the church board will not be able to make informed decisions for the organization’s mission.

Conclusion:

While both of these methods provide the basic needs for a church, they lack the ability to report needed information to manage a church effectively. Borrowing money from one fund to help another fund becomes difficult to track. Neither method will inform the church of how much money that is currently in the checking account belongs to which funds. A church could write a check and not realize until later that the money was earmarked for Hunger Relief. Neither method will provide a Change in Net Assets report. Neither method will provide a Statement of Activities or Statement of Financial Position strictly for one particular fund. These are all required by FASB for any nonprofit regardless of their size.

Fund Accounting:  A Better Method

IconCMO has deviated from the prior two methods mentioned above to be compliant with FASB. Funds are no longer defined inside the chart of accounts but rather separately. Each fund can be defined as Unrestricted, Restricted and Temporarily Restricted. Each fund can use the entire chart of accounts. The only requirement is that every transaction “must” have a “fund” designation. Because of this change a person can review the checkbook and see that of the $5,000 they have in the checkbook , $3,000 belongs to the General Fund, $1,000 belongs to World Hunger and $1,000 belongs to the Capital Campaign. Now a church no longer needs multiple checking accounts, spread sheets, or other creative accounting methods to know how much money belongs to each fund.  Because of this method, IconCMO now has the ability to extract data specific to a fund.  It can easily create usable Statement of Activities and Statement of Financial Positions specific to one fund or print a Change in Net Assets report that displays the monetary change for all funds over a given date specified.  It’s simply a better way to do church accounting and manage your finances.