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  • QuickBooks – Fund Accounting

    There are several differences in the methods used for accounting for churches and other Christian ministries that are not typical for secular business such as the use of Fund Accounting. Fund accounting is important so that designated and restricted funds can be separately recorded and tracked to ensure that funds are being used for their intended purposes. There are many accounting systems available that track several funds which is the essence of fund accounting. However; the most popular accounting systems available generally – such as QuickBooks, limit the number of funds to just one. I want to provide you with some “work-arounds” that will allow you to modify a single fund accounting system into a multiple fund accounting system.

    There are two acceptable methods that I want to discuss that will accomplish your goal of being able to track revenues and expenses of specific designated and/or restricted offerings. The first method limits transactions to the profit/loss (statement of financial activities) with a reconciliation to net assets at the end of the period.

    In your chart of accounts; you need to set up an expense line item – missions as an example. Then create two sub accounts called Missions Revenue & Missions Expenses. Obviously the name of the accounts would be different based upon the type of account and can be as specific as necessary. Revenues are recorded as an expense in the Missions Revenue account as well are expenses but in the Missions Expense account. Here is a sample of what your account should look like:

    Missions (expense account)
    Missions Revenue       -10,000
    Missions Expense           8,500
    Total Missions               – 1,500

    This method allows you to see a grand total of revenue, expense and net income of a designated and/or restricted fund at the same time. An adjustment will be necessary at the end of the period to transfer the designated revenue to above the expense line and adjust net assets. Here is a sample of the end of period journal entry:

    Missions Revenue                                              10,000 (DR)
    Tithes & Offerings: Missions Revenue                10,000 (CR)
    *Transfer revenue that was recorded as an expense to an actual revenue account

    Unrestricted Net Assets                                       1,500 (DR)
    Designated/Temp Restricted Net Assets              1,500 (CR)
    *Transfer net assets from the account that all net profits are credited and transferred to a designated net asset account

    The other method that I would like to share with you leaves the transactions on the balance sheet (statement of financial position) and is the preferred method. In your chart of accounts; you would want to create an equity account that is titled “Designated Funds”. Within that account; you would create a separate account per designated fund – for instance Benevolence, Missions, Youth Camp, etc. Here is an example of what your account should look like:

    Designated Account (equity account)
    Benevolence                      10,000
    Missions                               2,000
    Youth Camp                      – 5,000
    Total Designated Account 7,000

    Negative numbers indicate more expenses than revenues (negative net assets) and positive balances indicate more revenues than expenses (positive net assets) – since equity and revenue both carry credit balances. Revenues and expenses are recorded to one account and are displayed as net figures – in the interim period – until settled at the end of the period.

    All revenues and expenses would be tracked on the balance sheet rather than income/expense statement; which is preferred since designated and/or restricted funds would not impact the income and/or cash flow of the church. Many church leaders prefer this method since designated and/or restricted funds would not impact budgets since they are typically not budgeted anyways or outside of departmental budgets. Additionally; displaying net balances allow ministry leaders to understand at a glance whether a designated and/or restricted fund was cash flow neutral or not.

    An adjustment would need to be performed at the end of the period in order to reclass the equity account balances to either revenue or expense and then return the equity balance to the net amount prior to the adjustment. The remaining balance left in the “Designated Account” equity account is the remaining net assets that can be left as is to be carried over to the next period. Here is what the journal entries would look like:

    Benevolence (equity account)     12,000 (DR)
    Benevolence (revenue account)        12,000 (CR)

    Benevolence (expense account)  2,000 (DR)
    Benevolence (equity account)            2,000 (CR)

    Unrestricted Net Assets              10,000 (DR)
    Benevolence (equity account)          10,000 (CR)

    This transaction transfers $12,000 out of the equity account and into a revenue account while transferring $2,000 out of the same equity account and into an expense account – resulting in a net amount of $10,000 which is also your net income for the period. The net income then needs to be transferred from unrestricted net assets (or whichever account QuickBooks uses as its default location for net assets) and transferred back to the designated equity account.

    Keep in mind; that this method is great at always maintaining the net asset balance of designated and/or restricted funds at any given period, which is the balance that is always displayed. End of year entries will remove all the additions and subtractions to the net asset balance and reclass them as revenues and expenses while transferring net assets to the designated account for ongoing tracking purposes.

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