Large churches can have a complicated accounting structure but I strongly recommend a simple one. Fortunately all good accounting software allows for flexibility. The greatest area which needs flexibility is in expenses. For instance, some churches have large children’s departments with budgets for the different age levels (preschool and children) or even further sub-groupings (infant, preschool, early elementary, elementary, and middle school, and high school).

 

Some churches have even further needs for classification because they are multisite churches. For instance, they may want to track expenses across campuses for each classification (how much did we spend on craft supplies for our children across all campuses?) but also expenses within a campus (how much did we spend all the preschool program at campus X?).

 

This can be accomplished by adding a three digit department number at the front of the five digit accounting number. The accounting department can do an inquiry to get the financial info requested for each campus and/or budget line. Multisite accounting can be as simple as assigning a department number to a campus so that inquiries are made easier.

 

The critical path is to assign account and department/multisite numbers in a logical pattern which later makes it easy to retrieve data. If there isn’t a good pattern, then getting information will be difficult and that works against what you’re trying to accomplish: getting financial data to help you make better financial decisions.

 

Lead On!

Steve

A chart of accounts must start with the end in mind. The end is always the reports that you want to generate and use for decision-making. What data do you need and how should that info be presented? That determines the format of the chart of accounts. For example, all information about age-level expenses in a church should be in the same area of the CoA and not spread out everywhere; in fact, all the children’s and youth expenses should be grouped together and then sub-totaled which then totaled with other age-level expenses let the reader know how much was spent in that category.

 

The numbering system in a CoA is very logical. I recommend that accounts have no more than five (5) numbers but I’ve seen some as short as three numbers and as long as 16 digits. Five is a happy medium!

 

Here is the basic accounting numbering system which is used pretty much everywhere in the US (where AICPA controls the accounting system).

1XXXX – Cash

2XXXX – Payables, Restricted or Designated Funds

3XXXX – Retained Equity or Net Assets

4XXXX – Revenue & Receipts

5XXXX – Usually reserved for revenues related to special projects

6XXXX – Expenses

7XXXX – Expenses

8XXXX – Expenses

9XXXX – Usually reserved for expenses related to special projects

 

The first digit is the accounting classification. The rest of the digits can be used for sub-categories and other classifications. For instance:

61XXX Missions

65XXX Worship

68XXX Care & Fellowship

70XXX Discipleship-General

71XXX Preschool

72XXX Children

73XXX Youth

74XXX College

75XXX Young Families

76XXX Median Adults

78XXX Senior Adults

81XXX Office & Administration

85XXX Building & Grounds

88XXX Personnel

 

Finally, when the system is set up, the last digit is usually zero (0) so that additional lines can be added over time as needed without having to renumber the entire CoA.

 

Be familiar with the standard accounting numbering system so that when you see an account number, you’ll have an idea of what its accounting classification is. It will help you when you meet with the finance committee.

 

Larger churches have more complicated accounting structures. See part 3 for larger church department and multisite accounting.

 

Lead On!

Steve

In part one, I talked in generalities about financial statements. This post is description of each of the major areas.

 

Balance Sheet (no other name for this doc)

• Assets
  • Cash on hand in bank and investment accounts
  • Petty cash
  • Sometimes it lists cash you’ll get within the next 12 months
• Liabilities
  • Payables – usually payroll taxes and payroll deductions which will be sent to the proper recipient the next month. These should never sit for month than a month.
  • Debts – long and short term debts for mortgages and building loans. Each debt should be listed separately so you’ll know what it was for. This must be updated each month as you pay down your debt.
  • Temporarily restricted funds – these are typically restricted by purpose (what they are for). Usually these monies are spent within 12 months for a specific cause such as mission trips, children’s and worship events, etc. Sometimes funds are there for years but each one should have a “sunset clause.” (see my UPMIFA blog post regarding what to do with “old funds”)
  • Permanently restricted funds are restricted by time (how long they are set aside). Usually these are put into an endowment fund because they time and purpose is longer than 12 months.
• Net Assets (also known as equity, retained equity, or owner’s equity)
  • This is the total cash balance of what the church has accrued since it was started. Often there are two figures for this: the current year-to-date earnings and the prior years’ earnings.

 

Profit & Loss Statement (also known as an Income Statement and Statement of Revenues & Expenses)

• Revenues or Receipts
  • This section is the total income for the church. I strongly encourage that this section have only revenues from the main purposes of the church. Include in this category only tithes, offerings, and other undesignated budget gifts.
  • You can have a subsection for other receipts such as interest, building use receipts, etc. but this receipts are incidental revenues.
• Expenses
  • These are budget expense lines grouped into categories with a similar purpose. Churches have several broad categories and the most common ones are:
    • Worship & Music
    • Care & Fellowship
    • Discipleship & Education
    • Missions & Outreach
    • Office Administration
    • Building & Grounds
    • Personnel

 

Lead On!

Steve

A chart of accounts (CoA) is the road map in accounting. It makes processing payments and receipts, creating reports, extracting information, and so many others things much easier. There are several well-established rules for creating a chart of accounts which have been codified by the AICPA (American Institute of Certified Professional Accountants). These patterns means that anyone pick up a financial statement from any company and pretty quickly get the information they’re looking for (presuming the data is in there to begin with). Look at your chart of accounts and see if it follows the rules listed in these blog posts.

 

Accounting uses different names for the same thing. It can be confusing but I’ll give you some of the variations. They’ve acquired these names over the years and in different industries but they mean the same thing.

 

Every CoA has several divisions. The most basic one is the Balance Sheet and the Income Statement. A balance sheet shows all the money an organization has (assets), all the debts it has (liabilities), and the difference between the two (retained equity).

 

You can create as many lines and categories in your financial statements as you need but not too many. Even the largest of churches do not have more than 300 (that includes bank accounts, designated funds, payables, revenue lines, and expense lines.

 

Get to know what each of these mean so that when you’re looking at a financial statement so you’ll know what the difference is between them and what their respective purposes are. Next post, the descriptions of these sections.

 

Lead On!

Steve