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

Financial statements should have these characteristics and here’s why:

• Simple

o   Any accountant can make financial statements hard to read and interpret but that undermines their goal of being a tool which is used to help the church make better decisions (not just better financial decisions).

o   Keep things as simple as possible because most people can’t read financial statements. If the statements are too hard to read, many people will conclude that things are being hidden from them and the trust level degrades.

• Transparent

o   All financial statements should have all church financial figures. Hiding or consolidating numbers is not good for the church. It decreases the confidence level members have in the church’s financial leaders. Besides, all the money was given by church members so they should be able to see where all the money is.

o   All financial statements should be published every month. If corporate America can put out monthly statements, then every church should be able to do that, too. I think complete financial statements should be made available to everyone who wants them every month, not just to the Finance Committee.

• Expectant

o   By this I mean the church should have high expectations of how its money is handled.

o   It should have highly qualified, fiscally impeccable, and well-trained staff in the Finance Office.

o   Its lay leaders should give their time to know the figures and help the church understand the figures.

o   The pastor and other ministers should understand their role in teaching generosity and personal financial priorities.

• Accountable

o   There is accountability to the church: if the leadership expectations are not being met, then the church should ask them to fulfill their responsibilities or seek others for these roles. There is also legal accountability: if anyone involved in the church’s finances has any hint of fiscal irresponsibility, then the church is obligated to remove him/her from that role.

o   All churches should have a financial audit at least every four years and in the off years, the church should have an “agreed upon procedures” audit. The AUP ensures the finance office is following best practices for a church.

These are non-negotiable items for me in a church finance office, its financial statements, and the people who work there (paid and volunteer). What are your standards?

Lead On!

Steve