Appendix 18

Accounting Understandings 

IT’S THE LITTLE THINGS

             There are many small, niggling problems in church accounting that can create confusion in the financial records unless they are handled similarly every time they come up over the years.  There may not be a clear way to deal with particular problems.  There may be differences of opinion.  But, while such problems can legitimately be handled in any number of ways it is better for all to agree on a single way.

             I suggest writing the preferred procedures down and keeping them in a binder that can be passed along from one bookkeeper to the next.  Thus, there will be reasonably compatible budgeting and reporting from year to year.

             It is not necessary that every treasurer absolutely must, without further thought, do things the way all predecessors did them.  But by writing these issues down future treasurers will have some guidance and/or understanding of what has been done in the past and why.

             Here are a few examples.  None of these must be followed as set forth here.

ACCOUNTING UNDERSTANDING #1 

PRE-PAID STEWARDSHIP COMMITMENTS

 Situation:  Some stewardship commitments are paid in a lump sum prior to the beginning of the fiscal year for which they are intended.  For example, at the time a person is visited they agree to give so much to support the congregation for the following year and write out a check for the amount at the same time.

 Treatment:  Such payments are to be brought immediately onto the books as a gift from the donor and an increase in cash.  Then they are immediately expensed into the pre-paid commitment sub-account within the contingency fund.

 As soon as practical after the start of the fiscal year (certainly before the end of the first quarter) such reserves are to be credited as income from the reserve account.  They are not treated as a donor gift at that time (since that already occurred).  The crediting of all such payments is a single transaction, not spread throughout the year since the cash has already been received. 

 The level of annual stewardship income expected each month should reflect all early payments as received in the first quarter.

 Result:  At year end there will nearly always be pre-paid stewardship commitments in reserve.  By the end of the first month or so there will be none.  It is conceivable, though unlikely, that someone might pre-pay their commitments a few years in advance in which case the reserve account would have a continuing balance.

 K. Peter Henrickson

Finance Director

ACCOUNTING UNDERSTANDING #2 

CREATING RESERVE ACCOUNTS 

Situation:  Someone or some group wants to contribute money for some particular future use.  There is a strong feeling that the money needs to be “kept track of separately, in a separate account”.

 Treatment:  Reserve accounts are used sparingly to avoid duplication, misunderstanding, and excessively cluttered financial statements.  They are established by the Board in consultation with the Finance Committee.  There will always be a written description of the intended eventual use of the account as well as a clear designation of who is recognized to authorize spending of the reserve amounts.

 Reserve accounts are not used to isolate funds by source; rather, to isolate funds by purpose.

 Result:  There will be a smaller number of separate funds, and some of them will be used for multiple gift sources.  Since the use for a single general purpose -- for example, playground equipment -- they can be co-mingled.  A review of the ledger sheet for any reserve account will detail each separate gift and identify its source.

K. Peter Henrickson

Finance Director

ACCOUNTING UNDERSTANDING #3 

TREATMENT OF DESIGNATED GIFTS AND RESERVES

Situation:  Funds are given with a designation for some particular purpose.  There is little predictability as to when such gifts will be received or spent.   

Treatment:  The receipt of funds for specific designated purposes is credited to income as “Special Designated Gifts”.  In general such gifts should be immediately expensed to one of the Future Spending Reserve accounts through “Transfers to Reserves – Special Gifts”.  (If it is clear the money will be used in the current fiscal year it may be expensed later directly through “Use of Reserves & Special Gifts” without putting it into a reserve account.) 

Usually funds coming out of Reserve accounts are not for anticipated and budgeted items.  But, since spending reserves is directed by the appropriate person or committee it is certainly an approved expense of the congregation and requires a clear accounting of its use.  The amount should be brought in as revenue, “Unbudgeted Use of Reserves”.  The expense should be incurred in the appropriate program area under “Unbudgeted Expenses from Reserves”.   

All entries in and out of reserve accounts should include a memo note explaining the transaction.  Thus, a full accounting of any reserve account is available by reviewing the reserve account ledger, and of all incoming designated gifts by reviewing the Special Designated Gifts ledger. 

Result:  By using the above guidelines the budget will be unaffected by the receipt and use of special designated gifts while providing an accurate and complete statement during the year for the full financial operation. 

K. Peter Henrickson

Finance Director

ACCOUNTING UNDERSTANDING #4 

LATE EXPENSES 

Situation:  After the closing and reporting of a fiscal year there may be additional expenses which come in for payment.  These can upset the current year budget if they are large, creating an unplanned deficit situation which cannot be repaired. 

Treatment:  If such items are small (less than $200) they should be absorbed by the current year budget.  Only if they are large, or in total are more than $2,000, should all or some be charged to the Emergency/Contingency Fund. 

In the event they are specifically anticipated, the bookkeeper may expense temporary reserves for late expenses into the contingency fund before closing out the year.  Such expenses occur on the line item that would ordinarily be used for the expense.  Any such late expense reserves should not be on the books beyond the first quarter of the following year.  Funds remaining in the Late Expense sub-account on October 1 will usually be brought into the current budget as “Use of Reserves” income. 

Result:  Once the books on the year are closed, the amount showing as Accumulated Equity will remain unchanged until the close of the following year.  In rare circumstances that number may change mid-year if the Board transfers funds between Accumulated Equity and Reserves.  Such exchanges occur only with the explicit approval of the Board. 

K. Peter Henrickson

Finance Director

ACCOUNTING UNDERSTANDING #5 

UNREIMBURSED EXPENSES 

Situation:  Someone donates supplies or some other item and does not seek reimbursement.  The item is intended as a gift. 

Treatment:  Since such gifts are supportive of the operations of the congregation, one might believe that they should be reported and accounted for.  If not, the financial statements do not reflect accurately the “true cost” of running the congregation.   

In order to support such a stand however one must believe that three conditions will be met.  1)  The gifts of supplies, snacks, and so on must be a material factor in the operation of that program.  2)  All, or nearly all, of such gifts must be accounted for.  And 3), the gifts are necessary to the program and vary greatly in level from year to year, creating unplanned expense levels.  If any of these prove to not hold as true, the argument for pursuing an accounting for such gifts is considerably less robust. 

Further, in that posture those who manage budgets in various areas of church administration must necessarily accept that gifts in kind will show up on their financial statements as expenses against their budget even though the items were donated.  It is difficult to accept the notion that when someone donates supplies it is still an expense and actually reduces the remaining budget availability.  However, the flip side of accounting for the “true cost” of an operation is that such items are reported both as income and expense. 

For all these reasons: lack of materiality, lack of any control or knowledge about the “actual” extent of such gifts, and misunderstandings about how such gifts are to be accounted for, gifts in kind will not be routinely included in the financial reports. 

Result:  There may be occasions when this Accounting Understanding will be set aside, and some gifts in-kind will be accounted for, but most of the time such items will not be run through the books.  It is still important to recognize and be appreciative of such gifts.  And, if someone wants a written acknowledgment of such a gift it can be given without entering a transaction in the financial records. 

K. Peter Henrickson

Finance Director