Church and Christian Ministry Financial Management

1. Church and Christian Ministry Financial Management By Corey A. Pfaffe, CPA, PhD; Fall 2013

2. Accounting Methods • Accrual Basis; GAAP (Generally Accepted Accounting Principles) • Cash Basis • Modified Cash Basis

3. Accrual (GAAP) Balance Sheet • Assets • Liabilities, current & long-term • Fund Balances, unrestricted & restricted

4. Accrued (GAAP) Statement of Activity • Revenues & Expenditures are categorized in columns based on donor restrictions. • Ending Fund Balances reported here must equal Balance Sheet amounts. • Expenditures are reported by Activity.

5. GAAP Supplementary Information: Functional Expenses • Expenditures that were reported by activity on the Statement of Activities are recategorized based on function (program, management & general, or fund-raising) and nature.

6. Cash Basis Balance Sheet • A portion of the cash and equivalent-to-cash resources was received from donors who designated the purposes for which they could be spent. At the end of December, $11,000 of these gifts were yet to be disbursed for their restricted purposes. • $51,000 could be spent for any purpose authorized by the church itself since the original donations were unrestricted.

7. Cash Basis Report of Receipts & Disbursements (General Fund) • Unrestricted contributions and other receipts exceeded disbursements of these funds by $8,000 during the year ended December 31. • Payments on long-term debt and expenditures for long-lived assets (“Capital Expenditures”) are reported as disbursements. • This reporting format (and the cash basis) is perhaps the easiest to understand among the three choices.

8. Cash Basis Supplementary Information • While cash basis reports are easy to understand, supplementary information should be provided.

9. Modified Cash Basis Balance Sheet • The modified cash basis omits long-lived assets and long-term debt from the balance sheet, but includes short-term receivables and payables. • This approach avoids budgeting challenges and other shortcomings sometimes experienced when a strict cash basis is used.

10. Modified Cash Basis Report of Receipts & Disbursements (General Fund) • Budgeted revenues are “projected” while most budgeted disbursements are “authorized.” • Variance analysis can also be made based on percentage of actual to budget.

11. Modified Cash Basis Chart of Accounts Cash Petty Cash Cash in Bank Checking Cash in Bank Savings Cash in Bank CDs Marketable Securities Mutual Fund Public Company Stock Accounts Receivable Accounts Payable Credit Card Payable Short-term Bank Note Payable Fund Balances General Fund Designated Funds "Faith Promise" Missions Vehicle Replacement Camp Scholarships Benevolence Endowment Funds None Revenues Contributions Investment Gains & Losses Investment Income Auxiliary—Camp Miscellaneous Expenditures Ministry Teaching & Preaching Compensation Office Expenses Capital Expenditures Miscellaneous Music Compensation Office Expenses Capital Expenditures Miscellaneous Youth Compensation Office Expenses Capital Expenditures Miscellaneous Occupancy Utilities Repairs & Maintenance Auxiliary—Camp Compensation Office Expenses Capital Expenditures Miscellaneous Interest Miscellaneous Fixed Assets Long-term Debt Depreciation

12. Financial Audits • Independent Certified Public Accountant audit • Internal inspection—purposes: • To provide accountability for church leaders and staff as stewards of the resources God has committed to the church • To secure the confidence of the members in the reliability of the church financial reports • To maintain credibility of the church as a self-policing organization

13. The “Audit” Committee • Organization • Reporting Report of Audit Committee For Year Ended December 31, 20xx We have inspected the financial reports and related supporting records of the church for the year ended December 31, 20xx. The following procedures were completed: … In the course of our inspection we identified several recommendations that have been communicated to the church leadership.

14. Inspection Procedures—Illustrated • Compared budget amounts adopted by the church to actual receipts and disbursements for the year. Investigated major discrepancies and received satisfactory explanations. • Traced all significant Balance Sheet amounts to appropriate supporting documents. • Reconciled Fund Balances reported on the previous year’s Balance Sheet with current year increases and decreases in Fund Balances and current end-of-year Fund Balances. • Traced a sample of receipts and disbursements reported on the Statement of Receipts and Disbursements to bookkeeping records. Evaluated adequacy of documentation.

15. Accounting Software for Churches and Christian Ministries • QuickBooks—Online or Pro (or Peachtree Complete) • Advantages: well-known (likely to find members who are familiar with its use); easy to use; relatively inexpensive • Disadvantages: not a substitute for formal accounting training; poor internal controls; Not-for-profit version adds little value • Shelby (or other church-specific softwares) (http://www.shelbyinc.com/) • Advantages: specifically designed for church and ministry applications; valuable supplementary products available in donor and church management, etc. • Disadvantages: more expensive & complex

16. Giving Records • Ministries must carefully follow IRS guidelines when receiving cash and property gifts. IRS Publication 526 can be helpful. • Software can be very helpful in recording and reporting donor activity. • Annual reports to donors • $250+ contributions must be specifically acknowledged (date and amount); otherwise, total contributions can be reported on annual statements to donors. • Quid Pro Quo Disclosure: “The only benefit provided to the donor in return for his or her donation was an intangible religious benefit.”

17. Records Retention • Most financial and employment records should be retained for up to seven years. • A copy of each year’s annual report should be kept indefinitely. • Minutes of official meetings should be kept indefinitely.

18. Employment Records and Reporting • Churches and Christian organizations must meet virtually all of the records and reporting requirements stipulated for businesses. • W-2 / W-3 • W-4 / I-9 • 1099-MISC • 941 / 944 • FUTA / SUTA

19. Tax-exempt Status • The most recognized Internal Revenue Code section in the not-for-profit organization world: IRC 501 (c)(3) • Benefits of tax-exempt status • Ability to receive contributions that are tax-deductible to donors • Elimination of taxes 1) on profits, 2) on real estate, 3) on purchases normally subject to sales taxes, and 4) on salaries and wages that normally require employer-paid unemployment taxes • Application Form 1023 • Annual information return Form 990

20. Internal Controls • Cash receipts—“At no time is uncounted money to be in the possession of only one person.” • Cash disbursements—Before a payment is made, a ministry must assure that the product or service was • purchased by an authorized individual following an authorized procedure, • received in a useable condition, • priced as previously agreed. • Other controls