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May 10, 2023

Accounting for Churches: Everything You Need To Know

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Church accounting is the practice of financial records keeping and management specifically for religious organizations. Most churches belong to section 501(c)(3), which means they don’t have to pay federal revenue tax and can operate under nonprofit bookkeeping guidelines. Although these rules have much in common with the norms of maintaining the financial records of commercial enterprises, there are some differences between them. Let’s discuss in this guide the fundamental features of accounting for churches and how to set up financial procedures to avoid fines from the authorities.

The primary distinctions between commercial and church accounting

Temples and trading facilities are not similar in many paths since they have different purposes. The clergy do everything possible to bring maximum benefit to society; financial prosperity is of little interest to them. Even the wealthiest person in the world cannot buy temple securities or shares in its property. Any earnings must be sent back to the development of missions.

It is worth mentioning other distinctions as well. Religious institutions do not have to pay income tax, while commercial facilities are required by law to transfer money to the budgets of various levels. Since churches provide moral support to parishioners by investing their time and assets in society’s spiritual development, the government offers some benefits to such organizations. While temples do not have to compute revenue tax, they must make other mandatory property and government tax payments.

As we know, enterprises should prepare a profit and loss account to analyze the effectiveness of their activities. At the same time, religious institutions fill in the Activity statement, indicating earnings, spending, and assets. Another important document in the activities of chapels is the quarterly balance sheet, where the amount of capital is indicated as necessary. Because temples don’t have owners, they don’t produce a financial statement that lists obligations and wealth.

Since churches are nonprofit enterprises, they make up the Statement of functional expenses, a document that business owners do not fill out. Such a paper lets the rector obtain a complete picture of the primary sources of expenditures.

What is church accounting

Church accounting involves the planning, recording, and control of economic procedures that take place in the temple. Unlike varied business kinds, chapels are not aimed at making proceeds; they provide spiritual support to parishioners.

Since church bookkeeping concentrates on accountability and management rather than increasing revenue, they utilize a non-standard system of records. If trading facilities maintain one main ledger, the church has several registers to support different «funds». Such funds allow religious institutions to allocate assets to varying profiles to identify the origin of these resources and options for their use. Although churches do not pay taxes, they must record all transactions in detail when maintaining accounting records.

Churches receive funds to support their missions from various sources. Such money comes from the community and communities in multiple forms:

  • gifts
  • tithes
  • donations
  • grants
  • investments
  • fundraising campaigns, etc.

Since the amount of funding depends on the people who support the temple, they have certain restrictions; you can invest in implementing a specific project. Any profit that a religious institution receives is always returned to the chapel, or the clergy uses it to develop the missions of the temple. Despite the non-standard techniques of bookkeeping, churches are required to adhere to the requirements that the IRS publishes.

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How accounting helps temples?

An optimal way to control the above-mentioned funds is to organize correct bookkeeping. Proper interaction with foundations allows clerics to share profits according to sources and use cases and lets benefactors limit their donations to particular projects. Consider how a qualified church accountant can improve chapel finances:

  • Software assistance: chapels can save significant amounts by implementing effective digital solutions. Such software may automatically create ledgers, reducing the time spent working with registers.
  • Bank reconciliations: it is vital to ensure the money is actually where the church says it should be. It will prevent unpleasant surprises at the finish of the financial year.
  • Preparing financial statements: let’s say the temple is having a budgeting meeting. Do you have financial papers to assess a religious organization’s current state of affairs? If not, a professional bookkeeper will take care of such tasks.

Chapels must constantly monitor their books and payroll, which is why working with a qualified CPA is so critical. Keeping track of all economic aspects, from payroll to monthly reports, means the church’s leadership is always aware of the trends in the development of the religious institution.

Accounting for Churches: Everything You Need To Know

What reports do churches file with the tax authorities?

The key distinction between church and commercial accounting is that the tax authorities do not require temples to produce the same number of economic papers as other nonprofit associations; however, there are several papers you must create and keep. Consider the most famous variants:

  • Form 1099: If the chapel engages self-employed individuals for financial work, tidying up, renovating the interior, or other tasks, you must complete Form 1099. Whenever your religious institution pays outside professionals $600 or more, you must provide the appropriate IRS paperwork and transfer the invoice to the freelancer.
  • Form W-2: If your church has employees, you must also complete a Form W-2 for each employee at the end of the fiscal year. Small temples may not have to worry about this, but the preachers of large religious institutions will have to draw up such papers.
  • Form 990: If the rector plans to regularly file papers with the IRS to avoid auditing and increase trust among his parishioners, he must file a Form 990. Such a document makes the order in the ledgers and ensures financial transparency so that people who want to donate may trust your temple.

It is not easy to prepare financial documents correctly, and there is no shame in seeking the help of professionals. The friendly BooksTime team has extensive experience in providing support in this area; our proficients will be happy to discuss your temple’s unique requirements and create a system to assist you in obtaining the most out of every dollar.

The fundamental mistakes of church bookkeeping

Accounting for churches is a precise area of activity where the slightest mistake can lead to problems with government agencies. In addition, chapels may lose contributors if they do not adhere to strict bookkeeping standards. Let’s analyze some of the most common mistakes ministers make so you can avoid them:

  • No record of donations: faith-based institutions must record all donations from donors, including money received in cash, checks, or through virtual payment systems.
  • Tax mistakes: temples need to know how to complete tax forms. Depending on the chapel size, they may be exempt from certain mandatory payments or apply different rates. Late submission of paperwork may lead to substantial fines.
  • Refusal to regularly reconcile accounts: сlerics should check their accounts from time to time to control the bookkeeping of capital inflows and outflows. It is vital to avoid discrepancies between the amount of money you receive and the numbers recorded in the ledgers.

Many churches lack adequate segregation of duties because religious institutions are based on trusting relationships with employees, board members, and volunteers. However, it is crucial to choose the people responsible for depositing the capital, but these people should not be in charge of writing checks. Specialists who deal with checks should not be involved in checking the checkbook.

Some recommendations for how to do church bookkeeping

You need an accounting for churches that monitors capital inflows and outflows and controls assets and liabilities. The chapel bookkeeping algorithm can be drastically different, given the size of the church and its budget. However, there are some valuable church accounting tips that any religious institution should adhere to:

  • Use different funds: since the temple does not sell goods and does not provide services, there is no unified accounting. Some registries are needed to track different sources of capital outflow.
  • Work with bank deposits and control contributions: all donations to religious organizations must be strictly controlled, not taxed receipts. You should have bank deposit papers on your desk to ensure financial transparency.
  • Clear bank reconciliation is one of the most critical components of internal verification of economic manipulations. Although modern software may simply cope with such a task, you need a specialist to analyze the data and grow financial activity efficiency.

These are the basic techniques of bookkeeping in the church that will help keep your finances in order. You can outsource the financial activity if you cannot ensure every transaction is properly recorded.

Selecting software to simplify church bookkeeping

Adopting modern accounting programs to control finance makes it easier to maintain bookkeeping records in chapels. All digital products used in such an industry focus on the fund accounting system. Consider which software is most famous:

  • Aplos is suitable when we speak about churches of various sizes. The basic functionality of the application lets you track many different parameters. Religious organizations can budget and generate ledgers based on unique missions and projects. Aplos also works with payroll, so you don’t have to use another platform to account for permanent and occasional employee payments.
  • PowerChurch Plus creates a robust billing system to support small to medium-sized chapels that only need basic features, all at a fair cost. Besides accounting capabilities, the system lets you track contributors and plan projects.
  • IconCMO is well suited for medium-sized churches; it is a completely integrated platform synchronized with the Financial Accounting Standards Board guidelines and enables bookkeeping and other important options, including paper storage, event recording, a checklist of donors, etc.

When selecting the optimal church accounting software, it is necessary to consider the comfort of use and other important points. Ensure the system offers budgeting options allowing you to manage your finances and compare performance over different periods effectively. It is also essential to check if the application will enable you to perform operations with tithing, donation, and fundraising campaigns.

Bottom line

Stop wasting valuable time studying advanced church economics, worrying about how much money you have left in your bank accounts, or hoping your temple isn’t financially inaccurate. You should establish a clear structure to manage chapel finances and reports necessary to manage a religious organization successfully.

You are probably most effective when you spend time assisting people and improving the church rather than doing math. Group professionals of BooksTime guarantee accountability, financial monitoring, and consulting. You will receive regular insights and business documents essential to make informed decisions and ensure your church’s prosperity. Contact BooksTime experts today to find out how they may optimize your financial processes.

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Author: Charles Lutwidge

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