The most important element in bookkeeping for churches is integrity.
A 2022 study by Barna and others revealed that only 35% of surveyed Christians trust churches with their donations completely. This is a sad reality that reveals there’s a lot to be done to gain and keep the confidence of congregants.
We believe the first step towards rebuilding that trust is with an organized bookkeeping system.
Basics of Bookkeeping for Churches
Key Financial Statements in Church Management
Because churches are nonprofit organizations, their financial statements are slightly different, but similar in function. They reveal the activities the church undertakes and ensure accuracy of records. These accurate financials are necessary to maintain their nonprofit status.
Here are the general statements a church must have:
- Statement of Activities – This is basically an income statement. However, churches do not generate “revenue” like a typical for-profit organization. This statement shows how much the church received in donations, tithes, etc. and their expenses. It can reveal if the church is operating at a loss.
- Statement of Financial Position – This is like a balance sheet showing assets and liabilities. The difference is that instead of equity, it’s net assets. This is because nonprofits can’t issue stocks because they have no profits.
- Cash Flow Statement – This shows the inflows and outflows of money from the nonprofit organization. Nonprofit bookkeeping still includes operating expenses, and that includes churches. They can apply for financing (if they have built up trust through accurate reporting).
- Fund Balances – These are balance statements for specific needs. A church may raise a separate fund for community outreach and missionary aid, for instance. It starts with an opening balance at the beginning of the financial year and their totals at the end.
The Role of a Church Bookkeeper
Can just anyone take care of a church’s finances? Just like any other position, there are certain responsibilities and required skills a church bookkeeper(s) must possess. Their bookkeeping responsibilities include:
- Tracking expenses (rent, utility, funds, etc.)
- Managing payroll (if they hire people to help)
- Recording tithes and offerings and categorizing them into specific funds
- Categorizing transactions
- Creating journal entries
- Bank reconciliation and managing deposits
- Releasing funds for mission trips, wages, charitable causes, etc.
As we mentioned earlier, church bookkeepers must first have integrity. The next skill on that list is organization with a keen attention to detail. Honesty is crucial because the congregation entrusts their contributions to churches for specific causes. They must steward that trust with utmost care.
Many religious organizations have come under fire for misappropriation of church funds. That’s potentially one reason people have lost confidence. Therefore, anyone in this position must be diligent to uphold the proper accounting and moral principles.
Setting Up Your Church’s Bookkeeping System
Choosing the Right Bookkeeping Software
Generally, you want a software that is easy to learn and operate. It also should be affordable and flexible with its offerings. However, are there some specific features to look for in church accounting software? Here’s a few to consider:
- Reporting features and bookkeeping templates for church financial statements
- Online payments
- Expense tracking and bill management features
- Automations for categorization and reconciliation
- Check printing
Our recommendations for church accounting software are Aplos, PowerChurch, and Freshbooks.
Implementing Internal Controls to Prevent Fraud
Though churches should weigh the character of a person after a decent vetting process, no one is beyond temptation. As with any organization, there needs to be a set of checks and balances to prevent fraud in church finances.
This looks like having multiple people in charge of specific steps. For instance, those who count the money cannot deposit the money. Those who deposit the money cannot hold the revolving fund. Those who hold money shouldn’t be the one’s responsible for releasing funds for activities.
Managing Donations and Tax Exemptions
Tracking and Recording Donations
Churches must keep track of all donations made through cash (including digital payments) and check, and must report them.
One way to manage this is through fund accounting. This method basically limits the use of funds as limited by donors. The church can then create and maintain fund balances that show up in their annual report.
Your church should also prepare contribution statements or giving statements. This is both an acknowledgement and itemization of the donor’s contributions. This allows donors to claim a deduction on their taxes and is sometimes required by the IRS.
Understanding Church Tax Exemptions
Because churches are nonprofits, they do not pay an income tax. However, there are still some taxes to consider when bookkeeping for churches.
For example, one thing that’s commonly looked over is church payroll taxes. If you as a church hire someone as an employee, you are responsible for withholding taxes from their wages. This doesn’t apply for ministers and clergymen. This also means filing the correct tax forms (1099 and W-2).
If you own a building or other property, you will need to pay property taxes.
Budgeting for Churches
Creating and Managing a Church Budget
Funding for the church can come from tithes, offerings, donations, and support from larger churches’ support. However, not every offering is to help keep the church running. Sometimes, members designate their offerings for a specific purpose, such as missions or benefitting specific people.
This kind of “irregular income” makes budgeting a little bit tricky.
The first step to creating a church budget is providing an itemized list of church expenditures. This helps your church assess if they can undertake certain missions or outreaches. Most will prioritize creating a budget to meet operating expenses and supporting their pastors and ministers first.
A way to involve the congregation in your budgeting is to perform monthly church reporting. This also promotes financial transparency and may even encourage more giving if they see that there’s a genuine need or good cause.
Cost-Saving Strategies for Churches
What are practical ways to reduce church expenses without impacting services?
- Find a space that doesn’t cost to much in rent
- Limit the number of church events within the year
- Encourage volunteerism for church work
- Encourage potlucks
- Cut down on hiring outside speakers and spending on honorariums and “love gifts”
- Reconsider miscellaneous spending
One real life example of a cost-saving measure is running church out homes. This definitely works better for smaller churches with members willing to lend their homes for church activities.
Another cost saving measure is purchasing communion elements in bulk. Do you anticipate large crowds or an increase in the frequency of communion? Then stocking up on these and other necessities may cut costs in the long run.
Financial Reporting and Transparency
Preparing Annual Financial Reports
Speaking of financial transparency, let’s talk about financial reports.
It’s important that you create comprehensive and clear reports. This is not only for the IRS but also for your congregants and stakeholders.
It starts with gathering all the data and ensuring everything is accurate. Then, you’ll not only want to run the statements but also provide a summary and analysis. For annual reports, this can also include forecasts, breakdowns of activities, and sharing goals and objectives for the next period.
This transparency is not only for building trust, but also for involving stakeholders in decision-making. In a church context, these are congregation members, elders, volunteers and donors. As stakeholders, they can help with creating effective plans and strategies for better financial decision-making.
Communicating Financial Information to the Congregation
When presenting financial information to church members, there’s a few ways you can do it.
- Schedule a particular Sunday where you present the financial statements as is.
- Run through them line by line and briefly explain it as you go.
- Open it up for questions and respond as they arise.
- Present the analysis of these reports including key metrics. For instance, they can show that this amount of money paid for this many meals to feed the homeless.
Most churches do this through slide presentations so that members get a visual idea. These slides are then usually free to share among confirmed members of the church.
Frequently Asked Questions
How often should you conduct financial audits for churches?
You should conduct internal audits annually, at the very least. External audits are not mandatory or predictable, so you should always be ready.
What are the legal implications of incorrect financial reporting for churches?
Churches can lose their nonprofit status and incur tax penalties and lofty fines. On the congregation side, they could lose the respect and trust of members.
How can churches benefit from financial planning seminars?
Bookkeeping for churches is not the first thing on many ministers’ minds. These seminars can help equip them and their staff/volunteers in this secondary, yet still important, area.
What are the best practices for handling designated donations?
Create fund balances that you report periodically. Show your donors some proof of where their money went. You can do this by showing receipts and other documentation, like pictures.
How should a church handle financial contributions from anonymous donors?
List and report them just like you would any other donation. Make it a point to show gratitude verbally and by stewarding their donations well.
What Is AccountsBalance?
AccountsBalance is a monthly bookkeeping service specialized for agencies & SAAS companies.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
In Summary
Bookkeeping for churches can save a lot of legal and spiritual hurt. Not only can this practice lead to better management and budgeting. This practice can reveal a true heart of stewardship and service to the congregation and community at large.
