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Church and Christian Ministry Financial Management
By Corey A. Pfaffe, CPA, PhD; Spring 2010
Accounting MethodsAccounting Methods Accrual Basis; GAAP (Generally Accepted
Accounting Principles) Cash Basis Modified Cash Basis
Accrual (GAAP) Accrual (GAAP) Balance SheetBalance Sheet
Sample Local ChurchDecember 31, 20xx
AssetsCurrent 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 BalancesCurrent 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
AssetsLiabilities, current &
long-termFund Balances,
unrestricted & restricted
Accrued Accrued (GAAP) (GAAP)
Statement of Statement of ActivityActivity
Sample Local Church
Year Ended December 31, 20xxTemporarily Permanently
Unrestricted Restricted Restricted TotalRevenues 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: GAAP Supplementary Information: Functional ExpensesFunctional 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 SheetCash 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 & Cash Basis Report of Receipts & Disbursements (General Fund)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 InformationCash Basis Supplementary InformationSample Local Church
Supplementary Information--Designated Funds
Year Ended December 31, 20xxMissions Other Total
Designated Fund Balances, January 1, 20xx $4,000 $3,000 $7,000Receipts 18,000 3,000 21,000Disbursements -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 $100,000Principal Payments $7,000 -7,000Interest 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 SheetModified Cash Basis Balance SheetSample 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 Modified Cash Basis Report of Receipts & Disbursements (General Fund)& Disbursements (General Fund)
Sample Local ChurchYear Ended December 31, 20xx
Favorable(Unfavorable)
Actual Budget VariancesReceipts 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 AccountsModified Cash Basis Chart of Accounts
Financial AuditsFinancial 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” CommitteeThe “Audit” Committee Organization Reporting
Report of Audit CommitteeFor 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.
Report of Audit CommitteeFor 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—IllustratedInspection 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 Accounting Software for Churches and Christian MinistriesChristian 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 RecordsGiving 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 RetentionRecords 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 ReportingEmployment Records and Reporting
Tax-exempt StatusTax-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 ControlsInternal 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
Visit us at www.ministrycpa.com for more presentations or to connect with a tax professional.
Visit our Q&A blog at www.ministrycpa.blogspot.com
611 O’Connell StreetWatertown, WI 53094
(920) 261-7012Member: American and Wisconsin Institutes of Certified Public Accountants
