Accounting for Churches: A Quickstart Guide

Most ministry advice to pastors and ministers usually revolves around preaching, administration, conflict management, and church growth. But one crucial facet is often overlooked: financial management.

Accounting for churches extends beyond mere bookkeeping; your church treasurer or finance secretary holds the keys to the kingdom! Their work will secure your church's future and help advance your mission.

This article will dive into how churches record and categorize income and expenses, track tithes, offerings, and donations, and even generate detailed financial reports.

Church Accounting Basics

Church accounting and business accounting operate with different principles. It's important to know the difference.

Church Accounting vs Business Accounting

Business accounting focuses on maximizing profitability through revenue generation, cost control, and constant financial analysis. Businesses typically generate revenue from sales of goods or services, investments, or loans.

The primary purpose of church accounting is to advance the mission and vision of the church. This includes managing donations, tracking ministry funds, and maintaining transparency for members. Nonprofits and churches rely solely on donations, tithes, and offerings from members and donors for funding their ministry.

Once a church or ministry receives a donation, the next step is to set that money aside in a designated fund. Let's talk about fund-based accounting!

Fund Based Accounting

Fund-based accounting is a specialized accounting method commonly used by churches and nonprofits with multiple funds or "buckets". These "buckets" help you and your leaders know what purpose that money will serve your church.

By maintaining separate funds for designated donations, churches can ensure that contributions are used following donors' intentions and aligning with the church's mission.

Once you have your funds, categories, and accounts in place, you will need to begin tracking your donations.

Recording Donations

Donation entries are recorded separately so each donor gets credited for their contribution. Record them as your church receives them. It's best to have your donation management software open as you count the tithe so that you can count and record everything at once.

It's important to label each donation so that you can track where the donations go at your church. Properly labeling your donations will come in handy when you generate reports to give to other leaders so they can understand giving trends.

Pro tip: Implement a donor management, or church management software to track donations. This will make the process simple and efficient.

Financial Reports

Reports will give you the oversight you need to manage your ministry's finances. At the very least, church accounting needs these two reports:

1. Contribution Statements: Provide donors with their Giving Statements for their contributions. You can produce them monthly, quarterly, bi-annually, or annually. The important thing is to pick a schedule and stick to it
2. Monthly Reports: Provide church leaders with financial reports such as balance sheets, income statements, budget reports, to inform them of the church's financial health and performance

Check out our article on How To Generate Contribution Statements quickly and easily!

Church Payroll

No matter the size of the church, churches must file within IRS guidelines to ensure compliance and the financial integrity of their ministry.

Payroll tracking helps your church comply with legal and regulatory requirements related to payroll administration. This includes accurately calculating and withholding payroll taxes, and contributing to employee benefits.

Seek a Certified Tax Professional: Certified tax professionals (specializing in ordained clergy) focus on tax law and have in-depth knowledge of payroll tax requirements specific to churches and nonprofit organizations. They understand the unique tax-exempt status of churches, as well as any special exemptions or allowances available to religious organizations

How to Get Started with Church Accounting

Getting your church accounting processes off the ground is easier than you might think. In fact, there's only three steps to take:

Step 1: Gather Documents

You'll need the bank and other financial statements before you can begin.

Gather monthly statements from every account your church holds going back as many months as you need. We recommend gathering every statement from every month going back to the beginning of the current year, but having at least the most recent month's statement(s) is a decent place to start.

It will also help for you to already know what the money has been designated for at your church. So let's talk about funds...

Step 2: Create your Funds

Build your processes from the ground up.

A fund is a balance of money that's designated for a specific ministry purpose. These are restricted funds because the money can only be used for it's designated purpose.

Pro tip: Most churches only need 5-7 funds. Read our Less Is More: How Fewer Funds Can Simplify Your Church Finances post to learn more about setting up your funds for simplified church accounting. Simplifying your funds will go a long way to make your work easier and less stressful.

Step 3: Create Categories

You may be scratching your head and asking...

If you've been doing accounting for churches awhile, you may be familiar with the term "chart of accounts". Your categories will work much like a chart of accounts.

In church accounting, you need to list all of your income and expenses. That way, as you record transactions, you can label each transaction to better understand its purpose. This will also help you easily monitor the current balance of your ministry funds.

Note: Most of these steps will require communicating with other leaders at your church. Make sure to keep key leaders in the loop as you make changes. That way, everyone is on board and you ensure no mistakes are made.

Best Practices for Church Accounting

Creating budgets, tracking expenses, providing financial reports, oh my!

It's not as complicated as it looks. There are only a few tasks that a chruch treasurer or accountant will need to cover on a regular basis:

Budgeting for Churches

Develop and maintain a comprehensive budget that reflects the church's mission, goals, and financial responsibilities.

Regularly review and adjust the budget as needed to ensure effective stewardship of resources. By comparing actual expenses against budgeted amounts, churches can identify areas of overspending and underspending and make adjustments as needed.

Expense Tracking and Management

Expense tracking helps churches manage their budgets effectively, set financial goals, and plan for future expenses and investments.

By monitoring expenses closely, churches can ensure that monies are used responsibly and according to their mission and priorities, maximizing their impact on the kingdom of God.

Financial Reports

Provide your members and donors with up-to-date, accurate financial reports. Prepare contribution statements (AKA Giving Statements) for tax season, but also balance sheets and income statements for regular member financial meetings.

Do It the Easy Way

Stay on these tasks weekly and monthly. Even if your church only issues quarterly financial reports, it helps to record expenses every week and review the budget every month so that your reports are in order.

Also, using church finance software designed for you will simplify everything you do.

Put the "Fun" in Fund Accounting in Your Church

A Single Entry Accounting System that uses Cash-based or Fund-based accounting is best for most churches. It's all you need to do church bookkeeping and enables you to record and track church expenses, create church budgets, track funds, and more.

A system like this doesn't have to be difficult. In fact, finding the right tools can make a huge difference! Read on to learn what to look for in a church accounting software that will leave you smiling rather than pulling your hair out in frustration:

Are you Switching from Double Entry (Quickbooks, etc.)?

Here are some differences you need to know:

• Single Entry vs Double Entry: Double entry accounting is overkill for over 90% of churches. The single entry approach works just like your checkbook. You track your income and expenses to monitor your current balances on your assets and liabilities.
• Categories, AKA "Chart of Accounts": You use categories to identify or designate how money is received or spent
• Income Statement vs Profit/Loss Statement: In fund accounting, especially in non-profits, the emphasis is on tracking the sources and uses of funds, rather than profitability

Key Features of Fund Accounting Software

Here are some key features to look for when choosing a church accounting software solution:

• Fund Tracking: A Fund allows you to track a special or designated balance of money. For example, your church may have a Youth Fund or a Building Fund. The money in a fund is typically designated for a specific purpose. General Deposits and Expenses are not designated for a specific purpose and are said to be in the "General Fund"
• Income and Expenses: Most churches' primary income source is tithes and offerings. But your church will need to track all income, regardless of source. The same goes for every way your church spends money
• Managing Accounts: This can be anything from bank accounts such as checking, savings, to credit cards, mortgage, or other loan accounts
• Financial Reports: One of the most important aspects of managing church finances is generating reports. Choose a software that has everything from balance sheets, income statements, Contribution Statements, and more
• Budgets: The accounting software should allow you to create yearly church budgets and evaluate the amounts spent or received against what was budgeted

Pro tip: It's worth mentioning again because it's so important - The fewer the funds, the better! If you have more than a dozen funds, try removing or consolidating a few. This will greatly simplify everything.

Training and Support

Any software company that offers extensive training and support for their product is rare these days.

But it's important to choose a platform that empowers you to get started on the right foot. Also, make sure they don't charge extra to contact the support team.

What to look for: Extensive support documentation, a user community you can talk to, and free support are all signs that the company is worth your time and money. Even better if they have videos that illustrate how to use the software.

Accounting Tips: Bookkeeping for Churches

Here are a few helpful tips that will make your bookkeeping journey as smooth as possible:

• Keep Accurate Donation Records: There are rules for tax-deductible and non-tax-deductible contributions, in-kind donations, IRA disbursements, and several other giving rules. Churches are responsible for recording their contributions correctly so that IRS tax statements (Contribution Statements) are accurate
• Maintain Accurate Accounting Records: Keep accurate and up-to-date financial records, including income, expenses, assets, liabilities, and fund balances. Regularly reconcile bank accounts and review financial transactions to ensure the accuracy and integrity of the data
• Budget Wisely: Always remember, that income prediction dictates budget creation. Develop a comprehensive budget that aligns with the church's mission, goals, and financial priorities. Monitor actual income and expenses against budgeted amounts regularly and make adjustments as needed to stay on track
• Provide Financial Transparency: Communicate financial information transparently to church members and donors. Prepare regular financial reports and updates to keep members informed about the church's financial health and performance
• Invest in Training: Provide training and education to staff members, volunteers, and church leaders involved in financial management to ensure they understand accounting principles, best practices, and compliance requirements
• Seek Professional Advice: Outsource questions to a church accountant, or consult with a professional in church accounting and nonprofit management to address complex accounting issues, tax matters, or financial challenges

Time to Hit the Books (For the Last Time)

Accounting plays a critical role in managing your church. For small to medium-sized churches looking for tools to help you along the journey, a church accounting software designed with your church in mind will make all the difference.