Bookkeeping for Churches: A How To Guide

Proper bookkeeping is essential for churches to maintain financial transparency, comply with regulations, and effectively manage their resources. This guide will walk you through the key aspects of church bookkeeping, providing detailed insights and practical examples to help you establish a robust financial management system for your religious organization.

Understanding Bookkeeping for Churches

Bookkeeping for churches involves recording, organizing, and managing the financial transactions of a religious organization. It’s crucial for tracking income, expenses, and ensuring compliance with tax regulations for non-profit entities.

Unique Aspects of Bookkeeping for churches

Fund Accounting: Churches often use fund accounting to track restricted and unrestricted donations separately

Volunteer Management: Many churches rely on volunteers for financial tasks, requiring clear processes and oversight.

Setting Up Your Bookkeeping for churches

Choose the Right Software

Selecting appropriate bookkeeping software is crucial for efficient financial management. Consider these options:

1. QuickBooks Online: While not specifically designed for churches, it’s versatile and widely used
2. Aplos: Tailored for non-profits and churches, offering true fund accounting
3. Xero: A user-friendly alternative to QuickBooks with good functionality for churches
4. ChurchTrac: A fund-based accounting system ideal for smaller congregations

Establish a Chart of Accounts for Churches

Create a comprehensive chart of accounts tailored to your church’s needs. Example categories include:

• Assets (e.g., bank accounts, property)
• Liabilities (e.g., loans, accounts payable)
• Income (e.g., tithes, offerings, fundraising)
• Expenses (e.g., utilities, salaries, ministry expenses)

Set Up Fund Tracking

Implement a system to track different funds:

1. General Fund
2. Building Fund
3. Missions Fund
4. Youth Ministry Fund

Example: In your accounting software, create separate classes or categories for each fund to allocate income and expenses accordingly.

Recording Financial Transactions

Income Recording

Tithes and Offerings:

1. Count and record cash and check donations after each service.
2. Use a donation tracking system for online giving.

Example entry:

Special Donations:
Record restricted donations separately, noting any specific designations. Example entry for a building fund donation:

Expense Recording

Categorize expenses accurately:

1. Operational Costs (utilities, supplies)
2. Staff Salaries and Benefits
3. Ministry Expenses
4. Outreach and Missions

Example entry for a utility bill:

Managing Payroll

Set Up a Payroll System

1. Determine employee classifications (full-time, part-time, contractors).
2. Establish pay periods and salary structures.
3. Set up tax withholdings and benefit deductions.

Example: Use a payroll service like ADP to manage complex calculations and tax filings

Recording Payroll Transactions

Example entry for monthly payroll:

Financial Reporting

Monthly Reports

Prepare these essential reports:

1. Statement of Financial Position (Balance Sheet)
2. Statement of Activities (Income Statement)
3. Statement of Cash Flows
4. Budget vs. Actual Report

Example: Use your accounting software to generate these reports automatically at the end of each month.

Annual Financial Statements

Compile comprehensive annual reports:

1. Detailed Statement of Financial Position
2. Statement of Activities
3. Statement of Functional Expenses
4. Notes to Financial Statements

Best Practices for Church Bookkeeping

Implement Internal Controls

1. Segregation of Duties: Assign different individuals to handle cash, record transactions, and reconcile accounts.
2. Regular Reconciliations: Reconcile bank statements monthly to catch discrepancies early.
3. Approval Processes: Establish clear procedures for expense approvals and check signing.

Example: Require two signatures on checks over $500 and board approval for expenses exceeding $1,000.

Maintain Accurate Records

1. Keep detailed records of all transactions.
2. Store financial documents securely for at least seven years.
3. Use cloud storage for digital backups of financial records.

Ensure Transparency

1. Present financial reports at regular church business meetings.
2. Make annual financial statements available to church members.
3. Conduct annual audits or financial reviews.

Handling Special Situations

Managing Restricted Funds

1. Track restricted donations separately.
2. Use fund accounting to ensure proper allocation.
3. Regularly review and release restricted funds as appropriate.

Example: When receiving a $10,000 donation for the building fund, record it as:

Recording In-Kind Donations

1. Determine the fair market value of donated goods or services.
2. Record the donation as both income and expense.

Example entry for donated office furniture valued at $2,000:

Handling Special Events

1. Track income and expenses separately for each event.
2. Record net proceeds as income or allocate to specific funds.

Example for a fundraising dinner:

Compliance and Tax Considerations

Maintain Tax-Exempt Status

1. File Form 990 annually (if required).
2. Keep detailed records of all financial activities.
3. Ensure activities align with your church’s exempt purpose.

Issue Donation Receipts

1. Provide written acknowledgments for single contributions of $250 or more.
2. Send annual contribution statements to all donors.

Example receipt content:

• Donor’s name and address
• Date and amount of contribution
• Statement that no goods or services were provided in exchange for the contribution (if applicable)

Handle Minister’s Compensation

1. Understand the dual tax status of ministers (employee for income tax, self-employed for Social Security).
2. Properly allocate housing allowances.

Example: If a minister’s total compensation is $50,000 with a $15,000 housing allowance:

Conclusion

Effective bookkeeping is crucial for the financial health and transparency of churches. By implementing these practices and utilizing appropriate software, churches can maintain accurate records, comply with regulations, and focus on their mission. Regular review and adaptation of your bookkeeping processes will ensure continued financial stability and accountability. Remember, while this guide provides a comprehensive overview, consulting with a professional accountant or bookkeeper familiar with non-profit regulations can provide valuable insights tailored to your church’s specific needs.