Accounting for Churches: the Ins and Outs of Bookkeeping for Church Accounting 

Introduction to Church Financial Management 

If you are a church leader, planter, or pastor planning to start a new church, location, and staff aren’t the only things to consider. Before you open the doors and hold a service, you must make a plan for managing the church's income. Religious bookkeeping is not the same as managing revenue in a regular business because the goals are different. Where a business aims for profit, a church aims to carry out its mission. Churches aren’t looking at the bottom line; they’re looking at how they can serve others.

If church accounting isn’t something you’ve thought about, don’t panic. In this article, we'll tell you everything you need to know about accounting for churches, starting with why you need to approach your revenue and budget differently.

The main reason you will approach income differently is that it comes in different forms than a regular business. While a for-profit business earns money through basic sales that go into one general fund, churches can earn money in a variety of different ways such as:

• Tithes. Tithes (10% of a person’s income) will most likely make up the bulk of your contributions. They are typically recurring and provide a ballpark estimate of the revenue you can expect each month.
• Fundraisers and giving campaigns. If your church is hoping to build a new building or send the youth group to camp, you may host a fundraiser (car wash, spaghetti dinner, etc) or a giving campaign to raise funds. This money would go into a different fund than the general tithes and offerings because they serve a specific purpose.
• Sales. Yes, churches can sell things too! While sales will probably be the smallest of your income, it still must be recorded separately from other income.

Another reason churches must handle finances differently is for accountability, and not just to the IRS (more on that later.) When handling people’s hard-earned money (especially money that has been donated) you must be able to prove you are using it wisely. Maybe that will never be an issue, but if it is, properly documented records will save you and your church a lot of headaches.

Comprehensive Guide toChurch and Nonprofit Accounting Principles 

While the goal of church financial management is different than that of for-profit businesses, you don’t have to start from scratch with your accounting plan. General accounting principles still apply to churches and are a great place to start when making a plan.

A few basic principles to implement are:

• Revenue Recognition Principle. Revenue Recognition is a means of recognizing how and when money is received. Typically, this principle will not apply to your general tithes and offerings, but when you sell merchandise or services for a fundraiser.
• Cost Principle. The cost principle is simply recording your assets at the value at which you purchased them instead of their current market value. For churches, this could be anything from a building to sound equipment and cameras.
• Matching Principle. The matching principle requires businesses to report expenses at the same time as the revenue they are related to. This report should coincide with the period in which they are incurred (such as quarter or fiscal year).
• Objectivity Principle. The objectivity principle states that accounting information should be free of personal opinions. This means you only record facts and data supported by records and receipts.
• Full Disclosure Principle. The full disclosure principle is particularly important for churches because it ensures the church's financial statements are accurate and without blemish or misleading information. Churches have 501(c)(3) status, after all, and they need to be as transparent as possible to retain the trust of their donors and the IRS.

Remember,you don’t have to handle your church finances alone. When dealing with such delicate financial information, it’s wise to employ the help of a qualified accountant or online service (more on that later.)

Ethical Considerations forChurch Bookkeeping and Financial Management 

As a nonprofit with tax-exempt status, churches have a legal obligation to report their earnings and spending to the IRS. However, their moral obligation for financial transparency with their church congregants and donors is just as important. This ensures the integrity of the church’s use of its funds.

A few ethical considerations in church finances to consider are:

• Are you documenting every dollar earned and given?
• Are you categorizing each donation?
• Does every dollar spent go toward supporting your mission?
• Are your records readily available for the IRS and church members?

There’s a lot to consider when handling other people’s money, and you’re right to take your church finances seriously. There is plenty of accounting software out there to help you meet your legal obligations, but we want to help you meet your moral obligations to maintain transparency and trust among congregants.

This is one of the biggest differences between a nonprofit and a for-profit business. Your donors aren’t far away entities looking for a tax write-off. They’re your family, and you’ll see them at least once a week. You need to show them that their money is in good hands and being used to further the mission you both value.

A few ways to maintain financial transparency are:

• Include your budget in Sunday’s bulletin. It might seem awkward at first, but some churches choose to post their monthly and yearly budget in the bulletin each week. You can share how much revenue was received the previous week, how much you need to meet your monthly expenses, and any upcoming needs the church may have.
• Business meetings. If sharing your budget in the bulletin isn’t your thing, consider having a monthly or quarterly business meeting for your staff and congregants. At the meeting, you can share information about the budget, expenses, or even show them a bank statement.
• Email newsletter. Newsletters aren't just for events and new hires. It’s the perfect place to share your budget in a casual and transparent way. This would be particularly helpful if you are running a campaign for a particular project (like a new building or piece of equipment.) You can tell your congregants how much money has been raised, what you still need, and pictures of the items you purchase or hope to purchase. And be sure to tell them how their contributions are furthering the mission!

However you choose to handle your bookkeeping, remember you can never keep too thorough of records or be too transparent with your congregants.

Effective ChurchAccounting and Financial Planning 

Budgeting is an important part of every business whether it’s for-profit or not. Since churches don’t bring in as much revenue as other businesses, budgeting can be even more crucial. It’s not just about keeping the lights on (which your congregants will appreciate). Churches need to make sure they have enough money to do everything they want to do throughout the year. For instance, you know you have to pay your staff salary and building loan each month, but if you want to fund a mission trip, host a community Harvest Fest, and a live nativity scene, you need to plan for extra expenses before they come.

The church budget is one of the things you can share at the business meetings and newsletters. Your congregation cares about how you plan to spend their tithes and offerings. More than that, however, is a budget keeps everyone on the same page. Many churches have a board of directors, elders or deacons, and several pastors on staff. That can add up to a lot of opinions about how money should be spent. An official church budget makes sure there’s no squabbling over money.

Here is a list of things to include in your budget:

Income:

• Tithes
• Offerings
• Money raised in fundraisers/campaigns

Staff Expenses:

• Pastoral staff salaries and housing
• Employer pension contributions
• Employer health benefits (health insurance, ect.)

Administration Expenses:

• Bank charges
• Payroll expenses
• Office supplies/fees
• Technical support
• Miscellaneous

Nurture Ministries:

• Sunday school
• Children’s ministries
• Youth ministries
• Nursery supplies
• Adult Ministry

Building and Equipment:

• Rent/Mortgage
• Equipment expenses
• Repairs and maintenance
• Church supplies
• Dues and subscriptions
• Postage and shipping
• Insurance (liability, building, ect.)
• Electricity
• Internet
• Telephone
• Gas
• Water
• Miscellaneous

Ministry Expenses:

• Music supplies (instruments, microphones, speakers, ect.)
• Pastoral ministry expenses
• Pastoral travel expenses
• Pastoral staff education
• Conference expenses
• Seasonal decorating (wreaths, flowers, ect.)
• Baptisms
• Leadership development
• Miscellaneous

Mission Expenses

• Global missions
• Church planting
• Community outreach/giving
• Love donations
• Community food bank
• Disaster relief
• Miscellaneous

Not every category on this list will apply to your church and everyone’s budgeting process is different, but it’s a good place to start when making a budget. Consider giving each category a “monthly” and “annually” column so you can plan ahead for future expenses. Planning your budget by the year will help you plan your long-term goals and ensure your church is always growing and reaching more people. Remember, this might sound overwhelming, but once you establish a vision and plan, you’ll be well on your way to furthering your mission. It’s all about intentionality and organization.

Selecting Church Accounting Software: A How-To Guide 

Whether you’ve dealt with church accounting before or you’re brand new to the game, it’s wise to employ the help of church accounting software. There is no shortage of accounting software out there, so to avoid decision overload, we’re going to tell you about a few of our favorites.

• Wave. While not specifically for churches, Wave is a straightforward accounting software to help you button up your bookkeeping. Our favorite part about Wave is they have a free plan that’s perfect for small or startup churches.
• PowerChurch. If you’re church is large, growing, or you just want something tailored specifically to the needs of a church, PowerChurch software is for you. PowerChurch Software provides the tools you need to efficiently manage your membership, contributions, accounting, and events scheduling at unbelievably low prices. With a starting price of just 39.95 per month, PowerChurch will make bookkeeping a breeze.
• NetSuite. Here’s another software that’s great for large churches because NetSuite is designed to grow with your business. They provide one system for your entire company so you can make better decisions faster.
• Aplos. Aplos is another bookkeeping software designed specifically for churches and nonprofits. With Aplos, nonprofit groups and faith-based organizations of every shape, size, and mission can seamlessly run their finances and operations, manage their business and bottom line, and proactively engage their communities and donors when it matters most. Aplos is great for large and small churches that want to streamline their accounting processes so they can focus on their missions.

All of the above software would be an invaluable addition to your church. If you’re still scratching your head about which to choose, follow the links for a trial or tour of what each one can do for your church. Then, talk it over with your leadership team. Consider the size and mission of your church and the expertise of your staff. If you have someone well-versed in 501(c)(3) tax laws and church accounting, you could manage with one of the smaller or free software. If your church is growing, has a large membership with various means of income, or you don’t have a staff member comfortable with managing the finances, definitely choose one of the church-specific accounting software. They will not only protect your church but also relieve the mental burden of juggling the books.

Legal Compliance and TaxObligations for Churches 

Maybe you have accounting and bookkeeping mastered. You’ve done your research and employed the help of one of the above software. Good for you! Perhaps it's tax laws you need help with. Nothing gets the heart racing quite like the mention of the IRS.

Yes,even churches need to have a handle on tax laws, especially when 501(c)(3)status is at stake. Don’t worry, we’re here to help with that too.

First, let’s talk about 501(c)(3) tax-exempt status. This is what keeps churches and nonprofits exempt from state, federal, and even property taxes. To qualify, you will have to clearly state in your church's bylaws that your organization exists for religious purposes and to benefit your community, not for personal gain. Before you can file for tax-exempt status with the IRS, you’ll probably need to file “articles of incorporation” with your state department just like any other nonprofit organization.

In addition to the financial benefits that come from not paying taxes, 501(c)(3)status builds trust in your congregation and community. Tax-exempt status tells people they can trust you because you aren’t looking to get rich off of their contributions. They’ll trust you with their dollars because you share a common mission and have been approved, by law, to be a legitimate nonprofit organization.

Once you’ve secured your tax-exempt status, you’ll want to take care to keep it. If your church is devoted to its mission and serving the community, you have nothing to worry about, but here are a few things to consider:

• You still must report financial activity to the IRS. When tax season rolls around, you’ll have paperwork to file like everyone else, typically a Form 990. On the 990, you will report all income and expenses for that year, so make sure your books are in order and keep all of your receipts. (Hint: this is where one of the above software comes in handy.)
• Your earnings must be used for public good. Yes, you must pay your staff and keep the lights on, but the IRS wants to see that the majority of your income is funding the mission, not padding any individual’s pocket.
• Be careful with lobbying. The IRS has strict rules against lobbying for or against any political candidate. This doesn’t mean you can’t speak to the issues or candidates at hand, only that you cannot contribute significant funds to any party.

Tax laws are important. They protect you and the money so graciously donated to your mission. But, as you can see, if your heart is truly with the mission stated in your church’s bylaws, you have nothing to worry about.

Future of Church Accounting: Trends and Innovations

Technology is an ever-changing giant. It seems as soon as we adapt to a trend or development, it’s already yesterday’s news. So it is with bookkeeping software. The landscape of church accounting will probably look different in ten or even five years than it does today, but here’s what we know for sure:

• You’ll never regret keeping accurate records. Whether you’re audited by the IRS or forced to face sudden regulation changes, keeping good, detailed records of your church's finances is always wise. So, no matter what tomorrow holds, be sure to keep your receipts and write down those financial figures.
• It’s wise to back up your data. Gone are the days of keeping records in manila folders. Now everything is stored in the cloud. But just in case of technological difficulties, make sure you back up your financial records in at least one or two other places.
• Records are transferrable. Don’t feel like you’re stuck with any one accounting software. If your needs change or you see a technological change that would better suit your needs, you can transfer your data to another software.

FAQs 

How does church accounting differ from traditional business accounting?

The main difference between business accounting and church accounting is the net income of the church is used to further the mission spelled out in the bylaws, not for personal gain.

How can a church maintain its tax-exempt status while generating income?

By utilizing the majority of their net income to further the mission of the church. Remember, you can pay your staff and bills, but all extra income should go to community outreach, global missions, disaster relief, etc.

What are the best practices for managing and tracking church donations?

Utilizing bookkeeping software is the easiest way to track church donations. Even if your church is small, there are several free software options that will track all means of income and make tax time a breeze.

How can churches ensure financial transparency to their congregation?

By keeping proper records and making their financial practices public to the congregation, churches will maintain transparency and trust with their congregation. This can be accomplished through sharing the church budget in the bulletin, regular business meetings, or even a newsletter. Your congregation will appreciate knowing exactly how their money is spent.

What steps should a church take to prepare for an external audit?

Keeping proper records of all financial gains and expenses is the best way to prepare for an external audit. Don’t forget to always keep those receipts!

Church Bookkeeping Doesn't Have to Be Overwhelming

We hope this article has answered all of your questions about church bookkeeping and made managing your finances a little less daunting. Remember, it doesn’t have to be complicated and you don’t have to do it alone. All you need is good tax software, an organizational system, and a team of like-minded individuals ready to spread the mission of the church.