Understanding Fund Accounting

In Uncategorized by tfwm

Many church treasurers still keep manual accounting books. Others believe that any commercial accounting package will do. Some are even using home checkbook-type programs to do church books. These all seem like logical choices – so why aren’t they? Why are traditional accounting books, commercial packages and personal finance software programs often not the most cost- and time-efficient paths to take? To understand the ramifications of this question, we need to know the difference between a commercial or personal accounting system and one specifically designed for churches. Basically, it is a matter of “funds.” So, what exactly is a fund and how is a fund accounting program different from commercial or personal accounting?

An example: When you receive your $100 electric bill, write the check and send it off, you do not tell the electric company what to do with the $100. However, when you give $100 to the church, you may inform them to put $50 toward the operating budget, $25 toward the renovation of the organ, send $10 to a missionary, and dedicate $15 to the local food pantry. These four divisions of your gift represent the funds to which you are donating money. A good church accounting program automatically keeps these monies separate and ensures they are used for their intended purposes. A good financial program is one in which accounts are set up by funds, so tracking and reporting of these separate monies is a breeze.

The word “fund”
Probably the most confusing part of setting up a fund accounting system is understanding the word itself. A fund is not an asset account—a checking or savings account. The definition of a fund is “an accounting entity that needs to be kept separate, having its own source(s) of income and its own expenses.” The Building Fund Committee chair wants to know exactly how much money is in the building fund—how they started the year, what money came in, how much they spent and what remains. The Organ Fund chairperson needs to know exactly how much money is in the organ fund. The same is true for the Memorial Fund chair and down the line. This does not mean that the money must be stored in different places, however.

All of the money for each entity of the church can be stored in one checking account or many different asset accounts. In a recent training class, I met representatives of a large church with a multi-million dollar annual budget. They set up 30 different funds but only had one asset account—a checking account. Conversely, another church’s financial setup had three funds and 15 different asset accounts, including checking, savings, money markets, CDs and stock accounts. By looking at the fund balance accounts, they could know how much money was available in each fund. A fund activity report, including beginning balance, income, expenses, and ending balance, shows all of each fund’s activity.

Once the concept of a fund is clear, the first task in setting up a good chart of accounts is to make a list of church funds. Typically, there is one big fund labeled “operating” or “general,” plus multitudes of other funds. Some churches have five or six funds, while others list 60 or 70. The qualifiers are usually how detailed reporting needs to be and whether or not the money carries over from year to year.

The chart of accounts
In a chart of accounts within a fund accounting system, standard accounting procedures should be followed. The user must practice a double entry system and standard accounting numbering should be used. As in a commercial system, there are five different types of accounts. Account line items that begin with a “1” are assets — checking accounts, savings accounts, money markets and CDs. Accounts that start with a “2” are liabilities — payroll withholdings, mortgages, loans, accounts payables. Accounts that begin with a “4” are income — money coming in either through contributions, building rental, interest on savings accounts or others. Accounts that begin with a “5” are expenses — salaries, utilities, mission and programming. The difference here is the group of accounts beginning with the number “3.” In a fund accounting program, these are the “fund balance” accounts. In a well-designed program, by looking at these line items, users know instantly how much money is in an individual fund since each has one fund balance account, one or more income accounts, and one or more expense accounts.

Linking
For a fund balance account to properly track how much money it has, all fund balance, income and expense accounts must be linked to a fund. Some fund accounting systems accomplish this by physically linking these accounts to their appropriate fund. Others link with a number or series of numbers within the chart or account line item number itself.

Church administrators should remember to group line items together during the setup process so they can be subtotaled for reporting purposes. For example, line items might include electric, gas and water, and the user may want to see a subtotal for total utilities. Make sure all line item numbers are contiguous to accomplish this.

What happens when money flows in and out of the financial module? The fund balance account is automatically updated when income or expenses are posted to the system. When money comes in, either from a contribution or some other income source, the income account increases and the fund balance account goes up.

When an expense is posted — the telephone bill, for instance — the expense line item goes up, indicating that the church has spent more money for the phone, and the general fund balance goes down, showing that the general fund now has less money available.

Balancing
Every good accountant’s most important question should be, Is my system in balance? To know the answer, we need to understand the question. The formula is:Assets = Liabilities + Fund Balances

To help in understanding this concept, go back to the initial discussion of the basic setup of a financial program. In a perfect world with no liabilities, assets would equal fund balances.

For example, your church might have four funds—a general fund, building fund, missions fund and memorial fund. It may have one asset account—a checking account.
Checking account balance = $10,000
General Fund Balance = $7,000
Building Fund Balance = $1,000
Missions Fund Balance = $1,000
Memorial Fund Balance = $1,000

We’re in balance!

After putting the liabilities back in:
Checking – $9,500
Savings – $2,000
Liabilities – $350
General Fund Balance = $8,150
Building Fund Balance = $1,000
Missions Fund Balance = $1,000
Memorial Fund Balance = $1,000

We’re still in balance!

The audit trail
Many churches today still use either a manual accounting system or a personal accounting program. One of the dangers of these methods is that you can actually change a transaction. To leave an audit trail to satisfy an auditor, and also the finance committee of the church, this cannot happen. If an error is made, a reversal or a correcting entry should be done. Many times, people call for support on their accounting package and ask if it is possible to simply change something they entered so that it appears that no mistake was made. But the committee and/or auditor want to see the original entry and the correction or reversal and the corrected entry. This way, there can be no doubt about the books’ reliability.

Too often, even in the church, monies are “loosely” accounted for or innocently “misplaced.” And unfortunately, even in the church, dishonest people do try to misuse or embezzle money.

Protect yourself!
As a church treasurer or financial secretary, protection from suspicion and accusations is key. If this is your title, do not put yourself in the positions of money-handler and bill-payer simultaneously. Whether you are an elected volunteer or a paid employee, make sure tellers, or groups of tellers, count the contributions. Another good idea is to have a co-signer for checks going out.

One additional advantage of choosing a church-specific fund accounting program is its ability to integrate data. Information is coordinated among different modules of the program. The contribution module looks to membership to get names and addresses of contributors. Information then flows from the contribution module into the income portion of the accounting package. Payroll data is automatically calculated and updates the general ledger.

Investigating a fund accounting software package
If you are considering purchasing fund account software to help in this task, begin by looking at the capabilities of the program. It should allow for expense and income tracking, budgeting and comparison to budget reporting, and check writing. It should be able to generate fund accounting financial statements, provide a wide range of standard reports for committees and also be able to generate custom reports. The program should also be able to export all of this data to spreadsheets. However, as good as spreadsheets can be, they do not create an ironclad audit trail.

Many churches purchase their first program based solely on cost, but second-time buyers are concerned with a product’s features, as well as the manufacturer and technical support it offers. Ask for references and talk with actual users. Make sure the company behind the program has an 800-number, fax and e-mail support. It should also offer a useful web site with online support, product updates, newsletters and training information.

Happy hunting!