While the fundamentals of accounting are similar across industries, the desired outcome of the accounting function does vary depending on the nature of the organization. Unlike the corporate accounting methods used by for-profit businesses, fund accounting focuses on accountability and stewardship rather than “the bottom line.”
Using fund accounting for your church allows you to demonstrate financial transparency to congregants through the segregation of revenue and expenditures by department while maintaining compliance with legal requirements, and empowering leadership to make informed decisions about resource allocation.
Read on to learn more about fund accounting basics for churches, including all it entails and why it may be the best practice for your organization.
An Overview of Fund Accounting Basics for Churches
For businesses, the primary objective of the accounting function is to provide a record of revenue and expenditures to stakeholders in their pursuit of increasing profits. Accounting for nonprofits and churches, specifically fund accounting, focuses on tracking revenue from donations, grants, and other public or private funding as well as corresponding spending for accountability purposes. Fund accounting for churches provides segmented income statements and balance sheets, allowing the organization to track how various funds have been used. Ultimately, these financial statements provide a record to donors on how their donations have been used.
An example of when this approach would be beneficial is when a nonprofit has solicited funds for a specific purpose, such as a building fund. In such a circumstance, the donation would be categorized into a different department/class or “fund” than the operating account (general fund), helping to ensure that the money is spent how it is intended to be.
Regarding fund accounting basics for churches, here is a breakdown of different funds that can be used by a church:
- General fund – In fund accounting for nonprofits and churches, this category covers the costs associated with operating the church, with expenditures varying based on the church’s daily needs. Common examples include mortgages/rents, utilities, supplies, or new Sunday school materials.
- Mission fund – Funds of this type are used to cover mission work and typically come from restricted donations or excess general funds. Mission funds are often used in the course of church planting, donating to local community work, or contributing to international relief work.
- Building fund – Building funds are used to build and improve the physical space that a church operates out of and can cover such aspects as updates to the building, repairing crucial mechanical systems, improving landscaping, repaving a parking lot, and much more.
Why Should Our Organization Use Fund Accounting for Churches?
The benefits of using fund accounting for nonprofits and churches are varied, and include:
- Financial transparency – Since churches are 501(c)(3) organizations and have tax-exempt status, they should be able to provide financial statements that clearly communicate how they are spending the funds entrusted to them by their congregants. Fund accounting for churches is a best practice because it is able to clearly show the primary areas of expenditure.
- Donor accountability – When donors participate in various fundraising campaigns of an organization, they want to know that the funds they are contributing are being used for the purposes of the solicitation. Being able to provide financial statements that communicate that this is the case builds trust and encourages donations for the future.
- Operational assurance – Fund accounting for churches and nonprofits tracks spending and ensures that there are enough funds available for each area of the organization to continue to operate. It offers insight into where money is being spent and allows the organization to determine how much it has available for other expenses.
Need Help with Fund Accounting for Churches? Consult the Experts
If these fund accounting principles seem overwhelming, try outsourcing your accounting to the experts. Outsourcing your church accounting allows you to focus on your ministry while a dedicated accountant manages the finances of your organization.
One of the biggest advantages of outsourcing your church accounting is that it is often less expensive than if you were to hire an in-house employee with a similar skill set and level of knowledge. Another advantage of working with an outsourced team is that your financials will be reviewed by an independent party, adding a layer of transparency and accountability.
At ChurchShield, we have a team of degreed accountants who specialize in church accounting. We take the time to help you interpret and analyze your data to give you a greater understanding of your church’s financial position. With this well-rounded view of your financials, you will be able to fulfill your mission and be confident in the stability of your organization. Along with accounting, we also offer payroll, insurance, and compliance services.
Contact ChurchShield
If your organization is interested in learning more about fund accounting for nonprofits and churches or needs outsourced accounting help, be sure to reach out to ChurchShield today for more information.
We look forward to hearing from you!
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