Fund Accounting: What Is It and How Can Your Church Use it?

At its core, fund accounting is a method of keeping track of the donations received and the related expenditures. What is a fund? When donations are received, they are deposited into the appropriate fund. There must be a separate fund for each type of donation. Type of donation has nothing to do with the form (cash, check, card, assets) of the donation; it has everything to do with the intent of the donor and the limits place on the donation by the donor.
Every non-profit has a General Fund or GF. The GF is where unrestricted donations get deposited. This is revenue over which the organization has control as it is “without restriction”. The organization then spends the funds for program, operating, and fundraising expenses. In a typical church, the GF is used to pay for salaries, utilities, and other ongoing operating expenses. Spending these funds is controlled by either the congregation at large or some authorized group via a GF Budget.
Many churches have a Building Fund and a Missions Fund in addition to the GF. Most also have many other funds: Youth, Flowers, Benevolence, Women’s Ministry, etc. The list is endless. Every church gets to decide what type of donations will be accepted; every church also has a duty to honor the restrictions placed on the donations by the donors. This makes tracking revenues and expenses by fund imperative.
Churches often receive restricted contributions. The gifts may be restricted to the purchase of a piano or for a new building or for a missionary. When a church accepts a restricted donation, it is also accepting the responsibility of honoring the restriction. That means only using the funds for the donor’s intended purpose. For example, funds given to the building fund cannot be used to pay for operations.
The church does have a choice in the matter. If the church is not willing to accept the responsibility of honoring the restriction, the donation should be declined. It may be declined simply because the church has no intention of purchasing a new piano or no intention of renovating the worship center. Refusing a donation may very well be the best choice the church could make.
When restricted donations are received, the church is required to track them by restriction or “fund”. Donations given to the building project should go into the building fund; donations for buying flowers for the worship center should go into the flower fund. By segregating restricted contributions, the church can more easily honor the restriction. So how does a church do this? Fund accounting; keep reading.

1. The Statement of Financial Position (or Balance Sheet) is very similar to a for-profit entity. Think of this statement as a snapshot of the organization’s financial position at a point in time. The key difference is in the Fund Balance (or Equity) section. Instead of seeing “Capital Stock” and “Retained Earnings”, you will find “Fund Balances.” The fund balance is typically split between “Restricted” and “Unrestricted”. The balance in the GF (this should be cash) is the current surplus (or deficit) of unrestricted donations less GF expenses. The balance is the total of all previous GF activity—from the beginning of the organization. The other funds may be included as a lump called “Restricted Funds” or each one of them may be listed separately.
   If all activity has been entered and the books are up to date, the balance in the various funds represents the amount of cash available in that fund. (One exception to the fund balance representing cash is the “Fixed Asset Fund”. That balance represents the historical cost basis in things like land, buildings, equipment, and vehicles net of any accumulated depreciation. This fund balance is not cash; it’s “stuff”.)
2. The Statement of Activities (or Profit and Loss Statement) is a listing of the revenues and expenses for a particular fund. Think of this statement as a movie that shows the activity over a period. It should be noted that there will be a separate Statement of Activities for each fund. If a church has five funds, it will have five Statements of Activities. (It should be noted that some organizations consolidate all revenue and expense info for all funds and present it on one statement with a separate Statement of Functional Expenses included to show the breakout of expenses by fund.)
   Regardless of how the information is presented, it is important to note that every revenue and every expense relates to only one fund. So, only GF revenues and expenses appear on the GF Statement of Activities. The same is true for every other fund. It only makes sense that each fund is separated since the revenues and related expenses relate only to one fund.

Historically, churches opened a separate bank account for each fund. While this method works, it can be cumbersome especially if there are multiple funds and/or multiple transactions within the funds. Imagine having 20 bank accounts with each one having multiple transactions each week. Imagine the gymnastics required when a donor writes a single check that is split among multiple funds. Where does that check get deposited? That sounds like a nightmare. This method works, but it can be very inefficient—especially if the level of activity is high.
Another method is to use accounting software that is tailored to the needs of a church. Such software makes it easy to set up funds and then attach revenue and expense accounts to them. This allows the use of one bank account while still ensuring that the church honors the restrictions. Having one bank account to manage is much preferred to one account per fund. This allows the church to set up its bank relationship based on cash management. Also, fund accounting software can produce a report showing the income and expense for each fund over a given period. This is very helpful for reporting to the church—and to the donors.
FlockBase offers fund accounting designed to meet the needs of a small- to medium-sized church. It allows the creation of an unlimited number of funds and the related revenue and expense accounts. Another benefit of using FlockBase is the integration with a church management program to help manage member information, groups, communication, and contributions. Since these features are in the same program, it is integrated. For example, contributions are coded specifically to the correct donor and fund allowing easy accounting as well as appropriate donor reporting. For more information or a free, no-obligation demo of FlockBase, just email caley@flockbase.com or call (877) 883-5625 x102.

1. Know what restricted donations you are willing to accept. More importantly, know what restricted donations you are unwilling to accept.
2. Properly account for all revenues and expenses to insure that all donor restrictions are honored.
3. Find a church accounting software package that uses fund accounting. Don’t settle for a package that isn’t built on the principles of fund accounting. Better yet, find a church management package that includes an integrated fund accounting system—like FlockBase.