The How-To Accounting Guide for Your Church
Most churches are considered 501(c)(3)s, which means that they are exempt from federal income tax and aligned with nonprofit accounting standards. While these standards are similar to those of for-profit businesses, there are some key differences. This guide explores how and when church accounting contrasts with business accounting, while teaching you how to remain compliant with these standards to maintain your tax-exempt status.
- Church Accounting vs. Business Accounting
- Church Accounting Best Practices
- In-House vs. Outsourced Church Accounting
- Final Thoughts
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Church Accounting vs. Business Accounting
The basics of accounting are the same across the board; however, how nonprofits and for-profits apply them varies because they account for different types of transactions. Churches do not exist to turn a profit. As a result of this purpose, their accounting practices must differ from those of businesses.
Accountability vs. Profitability
Like other nonprofit organizations, churches rely largely on the support of their donors to continue operations. This is why it is essential that those who give to the church are confident in how it uses their donations. Even without restrictions, the church should invest all monetary offerings into its mission, in one way or another.
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Accountability and transparency are thus the watchwords for churches and other nonprofits, as they must show the clear path that their earnings take. For-profits, on the other hand, exist to earn as much as possible, so they are not accountable for much beyond the laws and regulations that govern corporations.
Multiple Ledgers vs. General Ledger
When a traditional for-profit business sells its goods or services, it adds this income to a single ledger. This general ledger self-balances to track all of the corporation’s financial transactions.
Churches, however, do not sell a specific good or service. For this reason, they need more than just a single ledger. Churches typically utilize a series of smaller ledgers to describe and track the variety of ways that they use their income. They then organize these smaller ledgers into a greater chart of accounts.
Statement of Activities vs. Income Statement
The overarching idea of accountability over profitability affects a nonprofit’s financial statements and reports. What businesses have dubbed an income statement is known as a statement of activities by churches and other nonprofits.
An income statement describes revenue earned by a corporation over a specific period of time. A statement of activities, on the other hand, focuses on a nonprofit’s revenue, expenses, and net change in assets over an accounting period. It offers your members a snapshot of how much money you brought in and how you used it for activities that are in line with your mission.
Statement of Financial Position vs. Balance Sheet
What for-profits call a balance sheet is known as a statement of financial position in the nonprofit world. A business’s balance sheet tracks its finances in terms of equity so that all of the stakeholders know where they stand in terms of profit. Churches do not technically belong to any one person — therefore, they use a statement of financial position to account for their assets and liabilities.
Pro Tip: When your church is searching for accounting resources, such as a certified public accountant (CPA), report template, or bookkeeping software, look for options that offer fund accounting. Fund accounting is essential to nonprofit accounting, as it tracks what funds go to what purposes. For example, if you have a successful fundraiser, you can account for these nonprofit donations by allocating them to ministry salaries.
Church Accounting Best Practices
Now that you understand a bit more about the accounting differences between a nonprofit and for-profit, let’s take a look at some tips on how to keep your church’s financial house in order.
Understand GAAP Practices and IRS Requirements
GAAP is an acronym for generally accepted accounting practices. The Financial Accounting Standards Board (FASB) created them, and all accounting professionals are required to follow them, whether they work for a nonprofit or for-profit. These guidelines include the following:
Principle of Regularity
Principle of Consistency
Principle of Sincerity
Principle of Permanence of Methods
Principle of Non-Compensation
Principle of Prudence
Principle of Continuity
Principle of Periodicity
Principle of Materiality
Principle of Utmost Good Faith
Pro Tip: To find out more about how these principles relate to your own accounting practices, check out this guide on nonprofit accounting basics.
While the IRS affords churches a lot of freedom, some nonprofit tax filing regulations do exist. For example, churches are not permitted to get involved in political campaigns by endorsing particular candidates. Below, we break down some of the most important forms that the IRS requires for churches.
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Churches must file a nonprofit 1099 with the IRS if they make payments of $600 or more to a non-employee, such as an independent contractor or freelancer. Examples of these individuals include:
Employee salaries get reported on Form W-2. This includes the compensation for the minister, pastor, priest, reverend, or other congregation leader.
The IRS does not require all churches to file a Form 990; however, it can be valuable to do so. First off, it promotes transparency, which protects your church against negative attention. It can also promote giving as a result of trust: when you share where your supporters’ money is going, they may be inclined to donate more.
Pro Tip: The IRS can audit nonprofits, but it is rare — even more so for churches. However, it can happen, so staying on top of your 990 every year ensures that your books are in order in case one does come along.
Create an Annual Budget
No matter the size of your ministry, creating a yearly budget is essential for financial health. In the last month of the fiscal year or the first month of the next one, draft a realistic operating budget. You can amend it later if necessary. Share the budget with any governing bodies in your church so that they can both approve it and stay up to date on upcoming plans.
Craft a Fundraising Plan
Can a nonprofit make money? Absolutely. In fact, nonprofits and churches alike require money to function. Like any nonprofit, your church should have a fundraising plan in place to ensure that it can continue to forward its mission.
Take a look at the last few years to decide what are reasonable fundraising goals. If you are attempting new initiatives, be conservative when you are forecasting their potential income.
Delegate Accounting Responsibilities
Accounting and bookkeeping require focus, knowledge, and training. Anyone in your church with a good head for numbers can be in charge of the nonprofit bookkeeping tasks, such as handling payroll, inputting donor information, and tracking online donations and tithes. However, accounting is more specialized, so only someone with at least a bachelor’s degree in accounting should handle it.
There are two ways your church can approach accounting: you can hire an in-house accountant or outsource it. In the next section, we will show you how to decide which method is best for you. However, even if you choose to outsource your accounting, you probably still need an employee to dedicate some time to basic accounting and bookkeeping tasks.
Pro Tip: No matter what decision your church makes regarding accounting staff, use a reputable church accounting software. There are many vendors that design this type of software specifically for nonprofits, including Springly, QuickBooks, Aplos, IconCMO, and PowerChurch Plus. With one of these programs on your desktop, you get access to an interface that does the math, generates the reports, and offers other features.
In-House vs. Outsourced Church Accounting
Most of your decision about whether to hire an in-house or third-party accountant comes down to the size of your church.
For a large church with a sizable budget, hiring an in-house accountant typically makes the most sense. The cost is a bit higher for this route, but you get an employee that is dedicated to your organization and its specific needs on a full-time basis.
Most small and mid-size churches tend to outsource their accounting needs. For one thing, smaller churches do not usually have huge, complicated financial documents that require full-time attention. And another, outsourcing is a cheaper alternative.
Anthony is contemplating whether to outsource his accounting efforts or keep them in-house.
While this option does not give you the personalized, full-time attention of an in-house accountant, it definitely offers you expertise. Hiring a seasoned accountant who has experience with a number of churches means that you have someone at your disposal who has dealt with any number of questions and problems that tend to pop up for these entities. There is likely little they have not seen — or resolved.
Pro Tip: All accounting firms are not created equal. When you are choosing a third-party accounting service, do your research to find one that is especially experienced in working with churches. Churches have specific needs, and this professional should understand these needs as well as basic accounting practices and regulations.
When you are in the midst of founding a new church, it can be easy to overlook the nuts and bolts of your forthcoming financial operations. But when nobody on your leadership team has accounting experience, you may realize how truly complex this work can be.
The good news is that solid accounting is not out of reach. If you cannot afford a full-time accountant, you can always outsource to a third-party accounting firm. And if you do decide to "keep it within the church," the assistance of a nonprofit treasurer or bookkeeper and a nonprofit accounting software can ensure that your financial health remains up to par!
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💡What is fund accounting for churches?
Fund accounting refers to an accounting system that tracks how funds get used. Churches and other nonprofits use fund accounting because it emphasizes accountability and transparency, which are more important than the profitability that for-profit businesses track. Find out more.
🔑 Is in-house or outsourced church accounting better?
It depends on the needs of the church. Most small- and medium-sized churches opt for outsourced accounting because it is a more economical solution. However, large churches with more complicated accounting needs benefit from an in-house accountant who can focus entirely on them. Find out more.
📝 Should my church use an accounting software?
Yes. Whether you have a full-time accountant on staff or another employee who dedicates part of their time to bookkeeping, accounting software streamlines and automates transactions and reports. Find out more.