Fund Accounting For Churches: Key Principles And Best Practices
Receiving donations is the largest part of the revenue of a church, and some guidelines go along with receiving those donations. Most often the donations will go toward the operations of the church. However, sometimes people give money for a specific purpose, like a new piano or supporting a specific missionary.
As a pastor or church leader, you are responsible for making sure those funds are allocated properly. With fund accounting for churches, you can make sure the money goes exactly where it’s supposed to, and you don’t accidentally use it for something else.
Just remember, FUND accounting is FUN accounting. (Ba-dum-tss).
As a church leader, people trust you to handle their donations wisely. Whether you are new to ministry or a seasoned veteran, it’s easy to see there is more to managing church finances than meets the eye. Learn the benefits of quality church accounting software and how it can help you with fund accounting and more.
What Is Fund Accounting For Churches?
Fund Accounting is how churches track and report resources that are designated for specific purposes. Think of fund accounting as using buckets to sort your donations into. One bucket might be for general expenses and another might be for saving for a new church organ. When you need to pay your electricity bill, you’re not allowed to draw from the church organ bucket, you can only take money from your general fund bucket.
Fund accounting ensures churches use earmarked donations for their intended purposes, like missions, new equipment, or special projects.
A lot goes into managing the church’s finances, and there are some key differences between church finances, and a regular corporations. Unlike businesses looking to make a yearly profit, churches focus on spreading the gospel. The IRS requires nonprofit organizations to use fund accounting, but it also helps keep church finances organized while fulfilling its mission.
Types Of Funds In Church Accounting
In your church, you may receive different types of donations. But generally, they will fall into one of three categories.
1) Unrestricted Funds
Unrestricted funds are donations that you receive that can be used at the church’s discretion for the operation of the church. There are no rules attached to these donations so the church can do whatever they want with them. These funds are usually used for operating costs such as utilities, payroll, and supplies.
2) Permanently Restricted Funds
Donors are allowed to put restrictions on their donations. When they do this, it means that the church can only use the funds for the purpose specified at the time of donation.
For example, if a donation is made toward a special project or missionary organization that your church supports, by law, those funds are only allowed to be used for that specific reason. At our church, we do an annual fundraiser around Thanksgiving. We pick a local charity to highlight, such as the food bank or pregnancy center. Any donations received that are earmarked for that charity must be given to them.
3) Temporarily Restricted Funds
Temporarily restricted funds are a little different than permanent. They may be received with a specific restriction, but the funds are moved from restricted to unrestricted when the project is finished or a certain time limit is reached. For example, money is received to provide counseling services for two years, but after the two years have passed, any remaining funds are no longer restricted for that purpose.
Here are some examples of what you might see in the books at your church.
- General Fund: This is the main account the church uses for all the day-to-day transactions. You will see things like payroll, utilities, rent, and Sunday morning coffee supplies here. Most unrestricted donations will be allocated to this fund.
- Mission Fund: Earmark funds for specific missions the church supports. These donations will be restricted. Examples include short-term mission trips, funds for local outreach programs, or supporting missionaries overseas.
- Building Fund: Maybe you are saving for the purchase of a building, or you have upcoming capital improvements to make (eg. a new roof). Donations for the building can be restricted. Save them in a separate fund. Then when it comes time to pay for the building costs, the money will come from this fund.
- Endowment Fund: This long-term investment is designed so that the principal stays intact and only earnings are used. Churches use it to fund ongoing needs like ministries or maintenance, providing steady income while preserving the principal for future growth. Funds donated here are usually restricted. Your church policy will dictate whether the investment income is restricted or unrestricted.
- Youth Fund: You guessed it! These are funds that are specific to youth groups. A church youth fund can be either restricted or unrestricted, depending on how it is set up. You never know what kind of expenditures might show up here: a kiddie pool, bible study curriculum, mountains upon mountains of chips and pop. The sky is the limit…Or is it?
Why Fund Accounting Is Beneficial
To maintain your tax-exempt status, fund accounting is required by the IRS to clearly show how funds are being used for the benefit of the community. It also builds transparency within the church and ensures accountability. Donors want to know that money is used for its intended purpose, aligning with their intentions and the mission of the church.
Your church may have money for different things like the building, missions, or general expenses. Without a system, knowing how much you have for each can be hard. Fund accounting makes it easy to keep track so you don’t mix things up.
Implementing fund accounting on your statement of financial position and statement of activities will give a clear and precise snapshot of the church’s financial health. This will assist you and your finance committee when it comes to spending and making strategic decisions about the direction of the church.
Setting Up A Fund Accounting System For Your Church
Follow these simple steps when setting up your Fund Accounting System and you will save yourself a lot of time and headaches. Consult your church finance committee or a finance professional to make sure that your setup will comply with federal and local regulations.
Step 1: Define Fund Categories
Start by identifying the types of funds you will need to set up. Start with the General Fund and add from there. What ministry teams do you have? How are they funded? Be sure you are following financial management best accounting practices.
Step 2: Choose Accounting Software
Your accounting software needs to support fund accounting. Look for a budgeting feature that supports this. You will be required to approve and follow an annual budget. There are lots of options available that will cater specifically to nonprofit organizations. This will make it easier for your bookkeeper to generate all the required financial statements for your finance committee.
Step 3: Establish a Chart of Accounts
Set up your chart of accounts that includes all the funds you will be using. Establish a numbering system that works well for you and your bookkeeper. Follow basic accounting principles for nonprofit organizations.
Pro-Tip: Choosing Your Fund Account Numbering Standards:
The numbering of your accounts might look something like this:
1000’s: Start with your assets. This is what the church owns (eg. Bank accounts, Church building, A/V equipment)
2000’s: Next, number your liabilities. This is what the church owes (eg. Payroll liabilities, Credit cards, Mortgage account)
3000’s: Use these numbers to indicate equity. This is where you will create the fund accounts (eg. General Fund, Mission Fund, Youth Fund)
4000’s - Record your revenue here. This includes all donations and other income streams (eg. Donations, Book sales, Tickets sold for church events)
5000’s - Expenses go here. Create an account for the different expenses your church will have (eg. Office supplies, Payroll expenses, Mortgage interest)
Step 4: Implement Policies and Procedures
Develop clear policies for managing each fund, including guidelines for donations, spending, reporting, and accountability. Ensure that all church staff and leadership understand the importance of these procedures.
Our Top-Ranked Church Accounting Software Tools
These tools bubbled to the top of the dozens of software options that my team and I evaluated:
Best Practices In Managing Church Funds
There is a lot to managing the funds of the church and you may be feeling lost in all the terms and requirements involved, after all, you didn’t get into ministry so you could master accounting basics and adhere to generally accepted accounting principles (GAAP). These best practices can prevent you from getting lost in the weeds.
Best Practice #1: Keep it Simple…Seriously!
Don’t bog your chart of accounts down with too many funds. DON'T use a separate fund for each line item. It's tempting, I know. This only creates a more complicated scenario down the road. Managing the finances is easier and the most flexible when most of your funds are unrestricted. Start simple with a general and restricted fund account and add funds as needed.
Best Practice #2: Reconcile Your Accounts Regularly.
Reconcile your fund accounts regularly. The best practice would be to do it monthly when you receive your bank statements. This ensures that your recent transactions are at the top of your mind.
It’s much harder to do THIS at the end of the year when you have a whole 12 months’ worth of transactions to sort through. I’ve been there!
Best Practice #3: Stick to Your Budget.
Work with your stellar church finance committee to create and adhere to an annual budget that reflects your church’s goals and priorities.
Your budget is closely related to fund accounting and they work together to ensure good financial management.
Compare your budget to the fund balances regularly to ensure you are on track for meeting your short and long-term goals. Make adjustments to your budget as necessary.
Best Practice #4: Provide Regular Financial Reports.
As stewards of the resources of the church, it’s important to provide regular financial reports to church leadership and the congregation. This goes a long way to maintain transparency and keep everyone informed about the church’s financial health and fund status.
Choosing Fund Accounting Software
Allocating donations at the church staff meeting can get PRETTY INTERESTING if you aren’t using church accounting software. There are enough software options to make your head spin. Some of the best accounting services and features to look for are:
- Capable of managing multiple funds - restricted and unrestricted.
- Includes a budgeting tool.
- Able to track donations.
- User-friendly interface.
- Can integrate with other software systems, such as giving software or donor tracking.
Join The Lead Pastor Email List
Don’t miss out! Join our community to stay informed, inspired, and up-to-date with the best tools for pastors and church leaders.
