fund-accounting-for-churches

How Can My Church Use Fund Accounting To Track Finances?

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Eva

Not all accounting is the same. The type of accounting used changes depending on the industry and the organization. Because churches and other nonprofit organizations have tax-exempt status, they follow strict reporting guidelines. Part of these requirements include using fund accounting to track grants, donations, and other revenue sources. 

Putting the legal requirements aside, being able to tell where your funding is going holds you accountable both internally and in the eyes of the public. While a church's top priority is to serve its community, a church’s accounting system is a vital part of ensuring a successful financial future. 

If you are unfamiliar with fund accounting, we have you covered. In this article, we outline everything you need to know about fund accounting, including:

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What Is Fund Accounting?

While the accounting goal for traditional businesses is increasing profits, that is not the role fund accounting plays for nonprofits. Fund accounting is a management system that tracks revenue from donations, grants, and other public or private funding sources. It is the practice of keeping track of your finances to be as accountable to the revenue sources as possible. In other words, the focus is on tracking your funding to use it to forward your mission. 

fund-accounting-for-churches-types-of-fund-accountingMary is wondering what fund accounting is.

A donor can restrict how and when they want a nonprofit to use their contribution. For example, a donor may give a donation under the stipulation that the church uses it for a scholarship fund. Fund accounting puts these types of donations into different groups, or "funds," to keep everything organized, guaranteeing that the nonprofit spends its money correctly.

Pro Tip: For successful fund accounting, you need an organized system for keeping track of receipts, invoices, and everything else finance-related. If you are feeling like you need some direction to get organized, we have some church accounting guidelines to get you on the right path.

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Types of Fund Accounting Funds

The practice of fund accounting puts assets into buckets. These buckets usually include unrestricted, permanently restricted, and temporarily restricted funds, which we explain below. 

Unrestricted Funds

Organizations can use these types of funds toward whatever they want because they do not have rules attached to them. Unrestricted funds are especially helpful for overhead costs that keep organizations up and running. Examples of these costs include:

  • Equipment, such as pews

  • Payroll

  • Rent

Permanently Restricted Funds

In some instances, a nonprofit gets a contribution with restrictions. The restrictions are in place for the entirety of the donation’s life. The donor outlines their restrictions when they give the contribution. For example, they may specify that the donation can only:

  • Fund a scholarship program

  • Pay for the renovation or expansion of the church

Temporarily Restricted Funds

This type of fund is meant for a specific project or a specific time period. What makes temporarily restricted funds different from permanently restricted funds is that when the project is completed or the time limit is over, the remaining funds get moved from restricted to unrestricted. 

For example, maybe a donor donates a large sum to help your church build an orphanage in Africa. If you still have money left over after you build that orphanage, you move that funding to the unrestricted bucket and use it as you see fit.

fund-accounting-for-churches-types-of-church-fundEmily is studying the different types of funds!

Other Types of Funds

While the above types of funds are the most common, there are other types you may encounter. For example:

  • Fixed asset funds: Fixed asset funds are assets that have a life of more than one year, helping you to generate income. They are usually tangible, physical assets, such as property and equipment. 

  • Board-designated funds: To create board-designated funds, the board of directors takes funds from an unrestricted account and designates them for a specific use. Unlike other restricted funds, the board, rather than the donor, decides how to use these assets. 

  • Endowments: While you may think of universities when you hear of endowments, nonprofits receive these types of donations as well. An endowment is typically invested money that earns revenue to fund a program or activity.

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Types of Church Fund Accounting Funds

In the previous section, we explored the types of nonprofits funds more generally. Below, we are going more in depth into the names that most churches give these funds.

General Fund

This type of fund covers most costs that keep a church running. The use of this fund depends on the church’s needs and operations, but here are a few common examples that you will find on a general fund statement each month:

  • Paying the electricity bill

  • Purchasing new prayer books

  • Buying Sunday school supplies

Mission Fund

These types of funds cover the philanthropic work that your church does for the community, either locally or globally. This money either comes from general fund transfers or specified donations. Here are a few examples of ways to use mission funds:

  • A donation to the local women’s shelter 

  • A contribution to the National Christian Foundation

Building Fund

A church uses the funds in its building fund for expenses that keep the property in good shape. For example, the building fund can pay to:

  • Update the plumbing system

  • Add a landscaper to the payroll

  • Repave the parking lot

Pro Tip: Churches have a lot of money going in and out. To help your church keep track of it all, consider using church accounting software. Springly has an accounting suite built into its all-in-one management software, but we also recommend QuickBooks Online, Aplos, and IconCMO. This type of software can draft sample church charts of accounts and other financial documents for you. 

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Why Use Fund Accounting

As nonprofit organizations, churches are legally required to use fund accounting. However, there are also other benefits to using it, which we break down below. 

Legal Requirements

As churches are considered nonprofits, they can become tax-exempt. Since the government is giving these churches such large tax breaks, they have to prove that they are benefiting the community. 

Therefore, the government requires them to employ the system of fund accounting. For example, when a church submits its annual 990 tax return or any other form to the IRS, it must apply fund accounting principles to show that it is not taking advantage of its status to use its funding improperly.

fund-accounting-for-churches-final-thoughtsSimon is celebrating learning about fund accounting!

Donor Accountability

Donors want to know how you are using their donations, especially if they have attached restrictions to them. Fund accounting shows transparency in your financial statements. This level of transparency can encourage your donors to increase their contribution or give more contributions in the future. 

Operational Assurance

A system for tracking your funds ensures that you have enough to stay operational. When you know how much money you are sending where, you can determine how much you have left for other expenses.

Pro Tip: If you feel like the fund accounting system is overwhelming, consider hiring a certified public accountant to help you. And, do not forget about accounting software, especially if you are a small nonprofit that cannot afford to hire outside help. 

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Final Thoughts

Our goal with this article was to give you the confidence to implement fund accounting within your church. The more you learn about these types of nonprofit financial practices, the better set up you will be to grow your church and help your community. 

Enjoyed the article? Download it to keep or share with others!

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FAQ

💡What type of accounting do churches use?

Since they are nonprofits, churches are required by law to practice fund accounting. Find out more. 

🔑 What types of funds do churches have?

Churches usually separate their funds into general, building, and mission buckets. Find out more. 

📝 Why should churches use fund accounting?

Churches are required by law to use fund accounting, but it also offers other benefits, including operational assurance and donor accountability. Find out more.

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Finance
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Eva
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