Tag Archives: FASB

Why a Church Balance Sheet is like a Pizza Pie

According to the Financial Accounting Standards Board (FASB), non-profit organizations – no matter the size – must produce a Statement of Financial Position. The Statement of Financial Position is a church balance sheet. In the past when viable software solutions were not available, churches would use separate checkbooks to keep the money separate for their ministries. Other creative ways developed over the years, like using spreadsheets or classes to tediously track money and produce reports.

These methods have led to inaccurate reporting, possible misappropriation of funds, slow production of the reports, and reports that were not in compliance. Fund Accounting was developed to help churches manage various funding sources and how money is spent. Fund accounting simplifies the process by having one checkbook, which is separated into multiple funds with individual balances.

To help clarify fund accounting, let’s pretend the checkbook is a pizza pie:

Picture of Pizza Pie representing a Church Balance Sheet

Each fund’s balance, or net amount, is a slice of the pizza pie. To simplify this example, we will not have any liabilities. If we apply numbers, the entire pizza pie is worth 1,000.00.  (Yes, we realize that is an outrageous price for a pizza pie.)

The Youth Fund’s slice is: 400.00
The General Fund’s slice is: 500.00
The Mission Fund’s slice is: 100.00
Total 1000.00

The total still equals 1,000.00, but each fund has their respective slice of the pizza pie representing the net worth. The General Fund owns the majority and the Mission Fund owns the smallest slice. This does not mean either fund is more important than the other, only that one fund owns more than the other. In fact, a common church process that is often out of compliance is taking in all money through the General Fund and then distributing it to other funds. This suggests a hierarchical structure where the General Fund oversees the other funds.

Now let’s look at some transactions and see why fund accounting looks different from the accounting methods used in the For Profit industry. The For Profit method is shown first and the Fund Accounting method second.

The organization receives a Telephone Utility invoice for 150.00:

According to the organization accounting procedures, the double entry accounting would state the following:

Debit Credit
Checking 150.00
Telephone Expense 150.00

This would not work or be in compliance with FASB because we do not know which Fund (remember funds are the slices of pizza pie) should be reduced to pay this bill, therefore adjusting the overall balance of the checkbook and the net amount of the fund. Fund accounting solves all these issues because you choose which fund should pay for this expense. In this example, the General Fund pays for this monthly bill.

The first part of the transaction mirrors the For Profit method; however, the addition of the Fund category is the key.

Debit Credit Fund
Checking 150.00 150.00 General
Telephone Expense 150.00 150.00 General

Now the new balances for each slice of pie should be the following:

The Youth Fund still owns: 400.00
The General Fund is reduced: 350.00 (500.00 – 150.00 = 350.00)
The Mission Fund still owns: 100.00
Total 850.00

Fund accounting empowers the church by giving it the ability to see financial reports for the whole pizza pie as well as for each slice. A fund accounting system can produce a balance sheet just for the General Fund that would show 350.00 in the checkbook, which is the net amount (worth) of the General Fund. Additionally, a balance sheet for the Youth Fund would only show 400.00. A balance sheet for all funds would show the entire 850.00 in the checkbook, but would not specify how much money is allocated to each fund. This type of report is typically called a consolidated balance sheet.

Advanced Setup:

Generic accounts minimize the Chart of Accounts and simplify reporting (i.e. having one Telephone Expense instead of a Pastor Telephone Expense and a Youth Pastor Telephone Expense). The following example will show a Telephone Bill that is split between the General and Youth Funds. Notice the same generic accounts – Checking and Telephone Expense – are used for both funds.

Debit Credit Fund
Checking 100.00 100.00 General
Telephone Expense 100.00 100.00 General
Checking 50.00 50.00 Youth
Telephone Expense 50.00 50.00 Youth

Now the new balances for each slice of pie should be the following:

The Youth Fund is reduced: 350.00 (400.00 – 50.00 = 350.00)
The General Fund is reduced: 400.00 (500.00 – 100.00 = 400.00)
The Mission Fund still owns: 100.00
Total 850.00

The Balance Sheet for the General Fund would show 400.00 in the checkbook as the net amount (worth). The user should be able to create a report for the Youth Fund and only see 350.00 on the balance sheet as the net amount (worth). If the user ran a balance sheet for all funds, it would still show the entire 850.00.

Icon Systems is the only church management software provider that is certified in the FAS 95 and 117 required by the Financial Accounting Standards Board for the fund accounting standards that all non-profit organizations need to follow. Visit www.iconcmo.com for more information or to register for a free trial.


Church Office Software – What Makes it Different?

Church office software has various shapes and sizes. It is appropriate to distinguish between “church software” and “church office software”.

Church Software” – is any type of computer software specifically designed for use by a church”. Church software can encompass different types of software such as: bible verse, media production, donation, accounting, mass emailing, sermon, worship, and music software.

Church Office Software is one of the sub types of church software. Typically, the secretaries and financial staff use it in the office. Examples of this type of software are membership, contribution, accounting, newsletter generation, office communication tools, word processing, and spreadsheet software. The software is the heartbeat of the organization. For example, churches can still do their mission if they did not have music or media production software. Conversely, if they do not pay their bills or record donations the church doors will not be open too long.

Church office software is so vital to the mission of the church in keeping it running and the doors open, would it not be beneficial to ensure you choose one that fits your organization and still obeys government guidelines (e.g. IRS, FASB, etc). If the church could choose one thing to be correct within their organization what would it be? Most churches would choose to have the financial books correct. After all, if the church sings the wrong song on a Sunday the IRS won’t be there on a Monday issuing a violation.

Most churches realize the importance of correct financial books; however this area of ministry comes second to all the other activities in the church. When reviewing software, churches focus on the integration of membership or building a community. While these are important, they will not keep the organization out of trouble like having correct financial records. Choosing software that keeps you in check with government agencies first while building a community is the best way to start looking at software packages. It is safe to say that if the software does not have accounting included it is not worth looking at as a complete Church Office Software.

Churches some times fall into the trap of software longevity. Icon Systems can honestly say a company’s longevity in the market is not a good indicator of following the guidelines for financial reporting. If the church is unsure we recommend they do their due diligence and investigate the financial reporting requirements. A good start is to review the blog about “Fund Accounting Methods Compared“. The post discusses scenarios of incorrect guidelines according to FASB that are used in the church software industry.

While all church software is important, if certain software is not used the organization can suffer dire consequences. An organization can lose their tax-exempt status when audited with incorrect financial statements according to the FASB guidelines. Whenever there is uncertainty about proper financial reporting of money within a church, distrust spreads within the organization’s members. An organization using a FASB compliant system like IconCMO cloud base solution can be assured they are within guidelines.


Church Bookkeeping Software vs Church Accounting Software

Church Bookkeeping Software vs. Church Accounting Software

Is there a difference between bookkeeping and accounting? If so, what is it?

Businessdictionary.com Definitions

Bookkeeping:

The systematic recording of financial aspects of business transactions in appropriate books of account.

Accounting:

The practice and body of knowledge concerned primarily with:

1.    Methods for recording transactions
2.    Keeping financial records
3.    Performing internal audits
4.    Reporting and analyzing financial information to the management
5.    Advising on taxation matters

It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm’s assets, liabilities and owners’ equity.

Accounting provides information on:

1.    The resources available to a firm
2.    The means employed to finance those resources
3.    The results achieved through their use

Summary

From the lengthy definition, it is obvious that accounting is somewhat more complex than bookkeeping. Basically, bookkeeping is the tedious task of entering the amounts and dates of revenue and expense transactions (i.e. contributions and purchases). Accounting is the bigger picture: an accounting system uses the bookkeeping information to create reports that can be used by decision-makers and for tax purposes.

Most church software applications accurately handle the bookkeeping part: tracking member donations and spending, even the printing or emailing contribution statements to members and generate giving total reports. Unfortunately, many of these applications fall short when it comes to the most important aspects of having accurate accounting records and providing the reports required by the Financial Accounting Standards Board. For more details, please read our post Fund Accounting Methods Compared.

Conclusion

All businesses, for profit or not, need accurate bookkeeping software to avoid negative consequences (e.g. fines, damaged reputation, having to close the business). These repercussions tend to be magnified for nonprofit organizations; they face losing their tax-exempt status, and the loss of credibility can prove to be devastating since the general public tends to hold churches and nonprofits to higher standards.

Icon Systems understands the value of accounting standards, and we make every effort possible to provide you with the tools necessary to ensure your church is in compliance with FASB guidelines. We even hired an outside CPA firm to certify our software, IconCMO, meets these standards!


Benefits of a Church Payroll Solution (Part II).

Church Payroll Software Cost and its Benefits

One option for churches is to outsource payroll responsibilities. Payroll services typically charge $1 or more per check, with a minimum fee of $10-25 each pay period. Additional fees are often incurred for quarterly reports and W-2 preparation. These fees can amount to a substantial number over time.

Another option is for the church to purchase payroll software, which usually requires annual upgrades. These upgrades are not only expensive, but the installation process also consumes your valuable time.

The Icon Systems payroll module provides you with an unlimited number of paychecks and pay periods for any number of employees for only $110 a year. Since the system is entirely web-based, upgrades are automatic and cost you nothing extra. Additionally, the web based capability allows payroll checks to be prepared offsite but printed on location for the staff.

Price should not be the only factor considered when choosing a payroll system. The benefits of using the right church payroll software are numerous; however, we summarized the most important ones here.

  • Confidentiality – Church payroll software needs to be password-protected so only authorized people have access to this confidential information. You can have volunteers and staff members use the system to enter contributions and even process accounts payable checks without making sensitive payroll figures available.
  • Accuracy– The importance of accuracy in any church payroll system cannot be overemphasized. Not only do employees rely on the church to calculate paychecks correctly, but reports created for the IRS and other government entities also need to be accurate. Issues concerning pay tend to quickly dissolve trust in any organization, not to mention inaccurate reporting to the government could result in heavy fines.
  • Integration – Using separate church payroll software requires you to summarize the information and record the journal entries in the accounting system. Since the IconCMO Payroll module links directly to the fund accounting records, you are able to allocate staff pay to various funds as well as obtain up-to-date, detailed reports that comply with guidelines set by the Financial Accounting Standards Board (FASB.)
  • Reliability – Icon Systems has been in the business of helping churches for the past 20 years and its certified church accounting software follows the FAS 95 and 117 guidelines. Since you trust Icon Systems to take care of your organization’s accounting needs, it makes sense to turn to us for your payroll needs also.

We hope you have enjoyed reading this two-part series about church payroll software – if you missed the first post, you can read it here.


The Secret to Affordable Church Payroll Software! (Part 1)

Payroll is one of the most difficult, time consuming, and costly administration tasks churches repeatedly encounter. Churches of all sizes are required to use “fund accounting” as described by the Financial Accounting Standards Board (FASB) guidelines. Fund accounting is a specialized way of accounting designed for non-profits; if you use this accounting method we recommend you read this informative interview with Nate at The Church Accounting Software Guide.

More often than not, Payroll + Fund Accounting = Confusion

FASB Reporting guidelines add to the difficulty, time, and costs already associated with payroll. For example, churches can use money in the General Fund and the Youth Fund to pay the Senior Pastor and Youth Pastor, respectively. Alternatively, both Pastors may be paid using money from the General Fund. On top of regular income, IRS reporting and taxes vary for items such as housing allowances and vehicle expenses. Paying church staff members can also prove to be tricky; reporting and taxes for hourly or salaried employees follow a completely different set of guidelines altogether. Payroll management also tends to get significantly more complicated for multisite organizations.

Payroll does NOT have to be time-consuming

The initial setup of a payroll system is expected to take some time; however, this task may be considered to be of lesser importance since it is not recurring. Completing the payroll for each pay period, on the other hand, needs to be fast and relatively simple. An effective, easy-to-use church payroll solution will substantially reduce the time needed for you to complete recurring payroll cycles, therefore lowering the overall costs associated with payroll. Evaluate your current payroll system by asking yourself these questions:

  1. How long does it take me to print employee paychecks?
  2. Can I pay tax liabilities to government agencies quickly and efficiently with only a few clicks of the mouse?
  3. Are the liability accounts automatically updated when I cut checks to make these payments?

*Making consistent entries to liability and expense accounts each pay cycle minimizes the likelihood of mistakes.

The Ultimate Cost-Saving Secret:

Systems that charge thousands of dollars for payroll essentially offer the same benefits and features as basic payroll software. Some of the expensive payroll systems do not even comply with fund accounting guidelines. The price of church payroll software is dependent on who enters the tax formulas, so find a package that requires the church to input the tax formulas. If your church leaders are willing to put in a few hours of work at the start, they can save the church hundreds if not thousands of dollars each year in payroll expenses.

Icon Systems has streamlined the recurring task of paying employees by incorporating payroll into the IconCMO fund accounting software system in order to reduce the difficulty, time, and high costs associated with church payroll administration!


6 Steps to Maintaining your Church Tax Exempt Status.

Lauren Hunter did a wonderful write up of what to look for in church software. Please read the full article. Below is just a summary of some of the information you will find.

Know what regulations pertain to churches and what organization creates them. Understand and know why you cannot keep balances in the revenue and expense accounts. Additionally, liabilities should not have fund balances because liabilities are money owed and not money the organization owns. Does church size matters when it comes to accuracy of church reporting or does the church have to report the financials at all?  There are two major repercussions of having bad financials. One is moral and the other is legal.  When an organization is out of compliance trust is lost in the community, which is the moral issue and is very hard to recover. The other is the church can lose its tax-exempt status and cannot claim to be a tax-exempt organization legally. Find out where to go to get more information. Tell us what you think.


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