As religious institutions, churches have unique needs when it comes to reporting their finances.
When Jesus asked his disciples to follow him, we can assume they quickly realized how little Jesus cared about money. And as a modern-day disciple and church leader, you are aware of the Bible verses where Jesus discusses how hard it is for a rich man to enter heaven, and how blessed are the poor. But Jesus also asks all those who follow Him to be fishers of men– to draw others to Him.
And, as a church leader, you heed this call as well. Although, unlike the first disciples, you’ll have much more on your plate when it comes to money management. As designated by the IRS, churches receive special tax privileges but also must follow specific rules.
To grow a church that will reach as many people as possible with the message of Jesus, then you must be knowledgeable about nonprofit tax rules, in-kind donations, annual operating budgets, financial statements, and the list goes on.
Lucky for you, there are businesses (like us!) that offer accounting services specifically for churches and church ministries.
Church accounting 101
As a nonprofit, accounting for churches focuses on demonstrating accountability. For-profit businesses have general ledgers to keep track of all transactions, but churches have multiple ledgers or “funds” to track and describe various sources and uses for the money. Categorizing money this way can be complicated, especially for a church where revenue will be designated by fundraising campaigns or departments or even restriction levels. Accounting firms who deal with churches can provide insight into organizing a church’s accounting tracking system.
Instead of income statements or balance sheets, nonprofit institutions, including churches, have to put out statements such as a statement of activities, financial position, cash flow statements, or a statement of functional expenses. These statements provide details on the church’s financial activity and net assets. Net assets are the nonprofit version of for-profits’ equity.
Filing taxes with the IRS and following specific tax rules is another area where churches must be knowledgeable. While many churches and organizations are exempt from even filing with the IRS, there are caveats to this. If a church is regularly engaging in business unrelated to its mission, it must file a specific form to account for this, and churches may file to be recognized by the IRS for the sake of their donors. While you can use the IRS informational PDFs (such as this one) to find this information, accounting firms with expertise in helping nonprofits and churches to stay in compliance are well-versed in all the up-to-date information to assist your church.
Common issues for churches
With accounting ledgers and statements, churches must understand the specifics of incoming donor funds restrictions and the rules or conditions for money usage as stipulated by the donor. These incoming funds are either designated as restricted (for a specific campaign or fundraising project or named object of the donor or grant) or unrestricted (for any use the Church determines). For example, grants given to churches often provide stipulations on how the grant must be spent. Another example of restricted funding is when a church is running a building campaign for a specific project.
Unrestricted funds help the church to pay monthly bills and salaries, for example. Without attention to balancing the fundraising between restricted and unrestricted revenue streams to cover the unique needs of the church, the church might be unable to pay bills or cover recurring ministries. This is why good accounting is so important for churches.
Outsourcing church accounting help
Churches and church ministries often have staff that wears several different hats, fulfilling many duties to keep the organization stable and mission-focused. If you Google “accounting for churches,” hundreds of books, courses, and instructional PDFs come up to assist church staff with the tools to effectively manage the church books.
When it comes to churches with smaller budgets or staff, it’s easy to see why accounting duties might be another task given to someone with multiple other jobs or a volunteer who lacks skill. But having someone handle the accounting who has other responsibilities isn’t a great idea if you want efficient and effective accounting that will help the church grow. And rather than hiring a full-time staff member to do the accounting, outsourcing an experienced accounting company can save you money when you factor in salary, benefits, and the whole package.
If you’re not going to outsource your bookkeeping or accounting, you should consider spreading the duties. Or have multiple people checking on the numbers to prevent issues like fraud or mistakes. Also, at least one person on the church staff should read and be competent in Generally Accepted Accounting Principles (GAAP) and IRS tax rules for nonprofits to ensure compliance.
Growing your church requires smart finances
It turns out that spreading the good news not only takes faith and passion, but also knowledge about finances. Annual budgets, multi-year plans, and goal setting are important for churches because growth – or as churches would call it, evangelizing – is a key part of any church’s mission.
Whether it’s allocating funds to different ministries that bring the newest parishioners into the church or deciding to hire a youth minister or other new hires who will further the church’s mission, these are decisions that are best informed by detailed financial records. The main source of income for churches is their community or congregation.
A church should know the status of its tithing, campaigns or events, and one-time donations, in addition to the role grants and investments play in the church’s overall revenue. Not only does good accounting delineate these various revenue streams into ledgers or funds, but it also enables the church to use this information for future planning and goal setting for growth.
Temple Management: your solution for church accounting
Temple Management is your solution for effective and efficient accounting to grow your church. Our professionals work strictly with nonprofits, so we know the ins and outs of accounting for churches. Whether it’s the IRS or donors’ expectations, we are ready to provide the organization with finances, reporting, and usable data to help church leaders succeed and expand.