Accounting for Contributions

Transcription

1 We make a living by what we get, but we make a life by what we give. Winston Churchill Accounting for Contributions It is Super Bowl Sunday, and the pastor announces during his sermon that a special Soup Bowl offering is going to be taken up for the downtown rescue mission. Of course he does this without talking to you, the treasurer of the church first. Or the singles group decides to take up a special offering to buy gift cards for single moms to buy Christmas presents for their children. How are you supposed to show these types of offerings in the church's financial records? These situations are the primary differences between non-profit and commercial accounting. Keeping track of special offerings and donor restricted contributions is one of the hardest tasks that church treasurers must account for. This document will explain the proper way to account for special offerings and gifts made with donor restrictions. This document is written for the church treasurer or bookkeeper. It is not designed to be an introduction to accounting and assumes a basic familiarity with accounting principles. You should be familiar with how debits and credits work and know the differences between Asset, Equity, Income, and Expense accounts. Determining the Type of Contribution The first thing we must do when we have a new contribution area is determine if the income belongs to the church. In other words, should an income account be increased when the money is received, or should the contribution be recorded as a liability and then decreased when it is paid? In our first example, the church would classify the soup bowl offering as a pass-thru contribution and recognize a liability until the money has been paid to the rescue mission. But, the singles gift card offering would be recognized as income by the church since the program of buying and distributing the gift cards is going to be administered by the church. The primary difference between these two contributions is who is responsible for seeing that the money is spent for the intended purpose. In the first example, the church is collecting money that is going to be turned over to the rescue mission. They are the ones who are responsible to see that the money is used in accordance with the donation. All the church is doing is passing the donation thru to another non-profit organization. If we determine the contribution does not meet the criteria of a pass-thru contribution, the second step is to determine if the donor has restricted the contribution for a particular purpose. This is the case of the gift cards in our example above; the donors gave the money for a specific purpose. The church is bound ethically, and in some cases even legally, to use the money accordingly.

2 In the absence of any such restrictions, the contribution is considered to be an unrestricted contribution. Unrestricted contributions can be used by the church for the ongoing day to day operation of the church, or for any other use as determined by the church s governing body. Types of Contributions All contributions can be classified as one of the following types of contributions: Unrestricted Contributions Contributions received to further the work of the church without any restriction on how, when or where the money can be spent. Examples of this type of contribution would be weekly tithes and offerings. Donor Restricted Contributions These are contributions received where the donor has specified how the money is to be used. This can be an explicit restriction by the donor, such as a letter accompanying the donation, or it can also be an implicit donor restriction, such as responding to an appeal for a specific purpose. Donor restricted contributions are further divided into two subcategories, Temporary and Permanent Restrictions based on the expected use of the donation. Temporary Restriction Contribution received for a specific purpose where the amount given can be eventually used. Examples of this type of contribution would be donations to a building fund, benevolence fund, or for any other specific purpose. Permanent Restriction Donation where the original contribution can never be used. The most common example of a permanently restricted contribution would be donations to an endowment fund. Pass-Thru Contributions As in our rescue mission example in the introduction, a contribution where the church is merely receiving the donation and then passing the donation along to another non-profit organization that is carrying out the work. Accounting for Contributions Each of these types of contributions is shown on the church s financial records differently. People use the information presented in the financial records to make decisions for and about the church. One of the areas that needs to be clearly shown is the amount and nature of money that is restricted and how it can be used. Now we will look at each type of contribution more closely and show the proper way to account for it. To illustrate how each type of contribution is accounted for, we are going to look at the accounting records of. On January 1, has the following balance sheet: Balance Sheet - January 1 Assets Checking Accounts $ 1,000 Land & Buildings 50,000 Total Assets 51,000 Liabilities Mortgage $ 20,000 Equity Unrestricted Equity 31,000 Total Liabilities & Equity $ 51,000 Types of Contributions 2

3 Unrestricted Contributions An unrestricted contribution is money received by the church that has not been restricted by the donor for a specific use. This will probably be the most common type of contribution your church will receive. Examples of unrestricted contributions would be the weekly tithes and offerings. Unrestricted contributions are the easiest type of contribution to account for. When the money is received, it increases an income account and also increases the bank account. On January 5 th, the first Sunday of the year, receives tithes and offerings of $2,400. The following journal entry records the contributions Checking Account January 5th Contributions 2, Tithes & Offerings Income January 5th Contributions 2,400 The above entry increases s Checking Account and increases the Tithes & Offerings Income account by $2,400. After posting the above entry, s Balance Sheet and Income & Expense Statement look like the following: Balance Sheet - January 5 Assets Checking Accounts $ 3,400 Land & Buildings 50,000 Total Assets 53,400 Liabilities Mortgage $ 20,000 Equity Unrestricted Equity 33,400 Total Liabilities & Equity $ 53,400 Income & Expense Statement January 1-5 Income Contribution Income Tithes & Offerings $ 2,400 Total Income 2,400 Expenses Fixed Expenses - Total Expenses - Net Income $ 2,400 There really is no special treatment for unrestricted contributions. The $2,400 received can be used by the church to meet its ongoing needs and does not have to be classified as a restricted amount on s Balance Sheet. Notice that the Unrestricted Equity account was increased by the $2,400 of contributions received. Donor Restricted Contributions - Temporary On January 12 th, the head of the property committee announces that $2,000 is needed to buy new cribs for the nursery, and that a special offering will be received for the next few weeks to purchase the cribs. In this weeks offering, receives $2,800 in Tithes & Offerings and $450 towards purchasing new cribs for the nursery. The total deposit for the Sunday giving is $3,250. The gifts for the new cribs would be classified as temporary restrictions. To keep track of the amounts received, some new accounts need to be added to the chart of accounts. For each restriction we will need three separate accounts, an equity account, an income account, and a release account. The equity account will keep track of the current balance of each restricted area. The income account keeps track of the total amount that has been received for each restricted area. The income account is setup to close to the equity account for this restriction. When the money is spent, we will use the release account to tell the system that restricted money has been used. This release account closes to the new equity account as well. The release account is a contra-income account, (Contra-income means the account s normal balance is negative) and will be shown in the income section of the Income & Expense statement. This is the account we will look to when someone wants to know how much of the money that was given has been used. Accounting for Contributions 3

4 In addition to the three accounts above, we also need to add a released from restrictions account. This account is used by all restricted areas and shows the total amount of restricted money that has been used by all restrictions. The following diagram shows the relationship between these accounts. Balance Sheet Accounts Each restricted area will have all three of these accounts: Unrestricted Equity Keeps track of the unrestricted portion of the church s total equity. Restricted Equity Look at this account to find the current balance of the restricted area. Closes To Closes To Closes To Closes To Closes To Unrestricted Contribution Income Holds the total received as unrestricted contributions. Released from Restrictions Shows the total released from all restrictions. Expense & Transfer Accounts Show the amounts expensed or transferred. Restricted Contribution Income Holds the total amount received for the restricted area. Restricted Release Account Shows the amount of the restriction that has been used. Income Statement Accounts So now that we know what accounts we need, we ll look at how this works. The following accounts were added to s chart of accounts to keep track of the New Cribs donor restriction. Account Account Name Closes to New Cribs Equity New Cribs Income New Cribs Release NOTE: In these examples we are using the same sub-account number for each group of accounts that keep track of the donor restriction. It is not required that you setup your accounts with the same sub-account number, but by doing so it makes the relationship between the accounts clearer. This also allows the use of the Sub-Account Report to quickly see the balances of these accounts. To record the contributions for January 12th, the following transaction is posted Checking Account January 12th Contributions 3, Tithes & Offerings Income January 12th Contributions 2, New Cribs Income January 12th Contributions 450 There is no difference between this transaction and how we would record unrestricted contributions. When the New Cribs Income account was added, it was setup to close to the New Cribs Equity account, which is a temporarily restricted equity account on the balance sheet. When a Balance Sheet is run, the income account closes to the equity Accounting for Contributions 4

5 account. This transfers the balance from the income statement to the balance sheet. This is what is meant by closing to; each income, expense, and transfer account on the income statement is set to close to or update an equity account on the balance sheet. After posting the transaction, new reports are run: Balance Sheet - January 12 Assets Checking Accounts $ 6,650 Land & Buildings 50,000 Total Assets $ 56,650 Liabilities Mortgage $ 20,000 Equity Unrestricted Equity 36,200 Restricted Equity New Cribs 450 Total Equity 36,650 Income & Expense Statement January 1-12 Income Contribution Income Tithes & Offerings $ 5,200 Restricted Contributions New Cribs 450 Total Income $ 5,650 Expenses Fixed Expenses - Total Expenses - Net Income $ 5,650 Total Liabilities & Equity $ 56,650 On January 19 th, receives $2,000 in Tithes & Offerings and $1,100 towards the new cribs. The following journal entry is recorded and new reports run Checking Account January 19th Contributions 3, Tithes & Offerings Income January 19th Contributions 2, New Cribs Income January 19th Contributions 1,100 Balance Sheet - January 19 Assets Checking Accounts $ 9,750 Land & Buildings 50,000 Total Assets $ 59,750 Liabilities Mortgage $ 20,000 Equity Unrestricted Equity 38,200 Restricted Equity New Cribs 1,550 Total Equity 39,750 Income & Expense Statement January 1-19 Income Contribution Income Tithes & Offerings $ 7,200 Restricted Contributions New Cribs 1,550 Total Income $ 8,750 Expenses Fixed Expenses - Total Expenses - Net Income $ 8,750 Total Liabilities & Equity $ 59,750 Accounting for Contributions 5

6 On January 20 th, after the deposit is made, the church purchases three of the cribs for $400 each. The following transaction records the purchase of the cribs Nursery Equipment Purchase new Cribs 1, Checking Account Baby's R Us - New Cribs 1,200 Since the source of the money used to buy the cribs was from a donor restricted amount, an additional journal entry needs to be recorded New Cribs Release Purchase new Cribs 1, Released from Restrictions Purchase new Cribs 1,200 This journal entry tells the accounting system that donor restricted money was used. This is a very important part of the process. Without this transaction, PowerChurch Plus will not know that money for the new cribs has been used and to reduce the money set aside for that purpose. Let s look at this transaction in detail. The New Cribs Release account is debited for $1,200. This account is setup to close to the New Cribs Equity account. When this account is debited it is reduced in value, which in turn reduces the New Cribs Equity account. The Released from Restrictions account is credited for the amount to be released. This account is setup to close to the Unrestricted Equity account; when this account is credited it has the effect of increasing the Unrestricted Equity account. After the transactions are posted, the accounts have the following balances: Balance Sheet - January 20 Assets Checking Accounts $ 8,550 Land & Buildings 50,000 Nursery Equipment 1,200 Total Assets $ 59,750 Liabilities Mortgage $ 20,000 Equity Unrestricted Equity 39,400 Restricted Equity New Cribs 350 Total Equity $ 39,750 Total Liabilities & Equity $ 59,750 Income & Expense Statement January 1-20 Income Contribution Income Tithes & Offerings $ 7,200 Restricted Contributions New Cribs 1,550 Release from Restrictions Temp Restricted Release New Cribs Release (1,200) Released from Restrictions Released from Restrictions 1,200 Subtotal Release from Restrictions - Total Income $ 8,750 Expenses Fixed Expenses - Total Expenses - Net Income $ 8,750 There are a few things to take note of after posting these transactions. Notice that the balance for New Cribs Equity account is now $350. This is what we would expect to have right now for this purpose. ($ ,100-1,200 = $350) Notice that the Unrestricted Equity account has been increased by $1,200. Once the donor restriction has been met, in accounting terms, the donor restricted amount is reclassified to unrestricted. The second transaction entered is the transaction responsible for making sure that the proper amount was moved from the New Cribs Equity to the Unrestricted Equity account. Accounting for Contributions 6

7 Also notice the new release section shown on the Income & Expense Statement. This section shows us the amount of donor restricted money that has been used. We see in this section that we used $1,200 of the new cribs and it has been reclassified to the unrestricted area. Let s take a look at another report from PowerChurch Plus. The Changes in Equity report will show us the changes in each of our equity accounts. Changes in Equity Beginning Income Release from Expenses Ending Balance Restrictions Balance EQUITY 3000 Unrestricted Equity ,000 7,200 1,200-39,400 Restricted Equity 3200 New Cribs ,550 (1,200) TOTAL EQUITY 31,000 8, ,750 The Changes in Equity report shows us a quick synopsis of what happened in each of our equity accounts. Using this report we can quickly see that our New Cribs account started with $0, we have received $1,550 and have so far have used $1,200 leaving us with a $350 balance for this area. On January 26 th, receives the following amounts in contributions: Tithes & Offerings $2,350, New Cribs $400. In addition, one of the members puts in the offering basket a check for $3,000 with a letter saying this amount is to be used as an extra principal payment on the church mortgage. The following accounts were added to the Chart of Accounts to keep track of the new donor restriction. Account Account Name Closes to Extra Mortgage Principle Equity Mortgage Principle Income Mortgage Principle Release The following journal entry is entered to record this week s contributions Checking Account January 26th Contributions 5, Tithes & Offerings Income January 26th Contributions 2, New Cribs Income January 26th Contributions Mortgage Principle Income January 26th Contributions 3,000 Accounting for Contributions 7

8 After posting the transactions, new reports are run: Balance Sheet - January 26 Assets Checking Accounts $ 14,300 Land & Buildings 50,000 Nursery Equipment 1,200 Total Assets $ 65,500 Liabilities Mortgage $ 20,000 Equity Unrestricted Equity 41,750 Restricted Equity New Cribs 750 Extra Mortgage Principle 3,000 Subtotal Restricted Equity 3,750 Total Equity 45,500 Total Liabilities & Equity $ 65,500 Income & Expense Statement January 1-26 Income Contribution Income Tithes & Offerings $ 9,550 Restricted Contributions New Cribs 1,950 Extra Mortgage Principle 3,000 Subtotal Restricted Contributions 4,950 Release from Restrictions Temp Restricted Release New Cribs Release (1,200) Released from Restrictions Released from Restrictions 1,200 Subtotal Release from Restrictions - Total Income $ 14,500 Expenses Fixed Expenses - Total Expenses - Net Income $ 14,500 That week the board decides to buy two more cribs. The following journal entry records the purchase and the release: Nursery Equipment Purchase new Cribs Checking Account Baby's R Us - New Cribs New Cribs Release Purchase new Cribs Released from Restrictions Purchase new Cribs 750 Only $750 is released from the New Cribs restriction because that is the remaining balance of the cribs restriction. The board decided the $50 balance will be paid out of general fund money. The mortgage payment is due at the end of the month. The normal mortgage amount is $1,300 of which $400 is interest. The transaction to record the mortgage payment and the sending of the extra $3,000 principal payment would be as follows: Mortgage Interest January Mortgage Payment Mortgage Liability January Mortgage Payment Mortgage Liability Extra Principle Payment 3, Checking Account Mortgage Payment 4, Extra Mortgage Release Extra Principle Payment 3, Released from Restrictions Extra Principle Payment 3,000 Both of these transactions recorded the release portion of the transaction along with the regular transaction. After posting these entries, new financial statements are prepared. Accounting for Contributions 8

9 Balance Sheet - January 31 Assets Checking Accounts $ 9,200 Land & Buildings 50,000 Nursery Equipment 2,000 Total Assets $ 61,200 Liabilities Mortgage $ 16,100 Equity Unrestricted Equity 45,100 Restricted Equity New Cribs - Extra Mortgage Principle - Subtotal Restricted Equity - Total Equity 45,100 Total Liabilities & Equity $ 61,200 Income & Expense Statement January 1-31 Income Contribution Income Tithes & Offerings $ 9,550 Restricted Contributions New Cribs 1,950 Extra Mortgage Principle 3,000 Subtotal Restricted Contributions 4,950 Release from Restrictions Temp Restricted Release New Cribs Release (1,950) Extra Mortgage Release (3,000) Subtotal Temp Restricted (4,950) Released from Restrictions Released from Restrictions 4,950 Subtotal Release from Restrictions - Total Income $ 14,500 Expenses Fixed Expenses Mortgage Interest $ 400 Total Expenses $ 400 Net Income $ 14,100 Changes in Equity Beginning Income Release from Expenses Ending Balance Restrictions Balance EQUITY 3000 Unrestricted Equity ,000 9,550 4,950 (400) 45,100 Restricted Equity 3200 New Cribs ,950 (1,950) - - Extra Mortgage Payment ,000 (3,000) - - TOTAL EQUITY 31,000 14,500 - (400) 45,100 On February 2 nd, receives the following contributions: $2,250 in Tithes & Offerings and $75 in memoriam to purchase flowers for the altar next Sunday. The following accounts were added to the Chart of Accounts to keep track of the new donor restriction. Account Account Name Closes to Altar Flowers Equity Altar Flowers Income Altar Flowers Release Accounting for Contributions 9

10 The following journal entry records these amounts: Checking Account February 2nd Contributions 2, Tithes & Offerings February 2nd Contributions 2, Altar Flowers Income February 2nd Contributions 75 New reports are run after posting this journal entry Balance Sheet - February 2 Assets Checking Accounts $ 11,525 Land & Buildings 50,000 Nursery Equipment 2,000 Total Assets $ 63,525 Liabilities Mortgage $ 16,100 Equity Unrestricted Equity 47,350 Restricted Equity New Cribs - Extra Mortgage Principle - Altar Flowers 75 Subtotal Restricted Equity 75 Total Equity 47,425 Total Liabilities & Equity $ 63,525 Income & Expense Statement January 1 - February 2 Income Contribution Income Tithes & Offerings $ 11,800 Restricted Contributions New Cribs 1,950 Extra Mortgage Principle 3,000 Altar Flowers 75 Subtotal Restricted Contributions 5,025 Release from Restrictions Temp Restricted Release New Cribs Release (1,950) Extra Mortgage Release (3,000) Altar Flowers Release - Subtotal Temp Restricted (4,950) Released from Restrictions Released from Restrictions 4,950 Subtotal Release from Restrictions - Total Income $ 16,825 Expenses Fixed Expenses Mortgage Interest $ 400 Total Expenses $ 400 Net Income $ 16,425 Changes in Equity Beginning Income Release from Expenses Ending Balance Restrictions Balance EQUITY 3000 Unrestricted Equity ,000 11,800 4,950 (400) 47,350 Restricted Equity 3200 New Cribs ,950 (1,950) - - Extra Mortgage Payment ,000 (3,000) - - Altar Flowers TOTAL EQUITY 31,000 16,825 - (400) 47,425 Accounting for Contributions 10

11 The flowers are purchased later that week, and the following journal entry records the payment Flowers Expense Altar Flowers Checking Account Altar Flowers Flowers Release Alter Flowers Released from Restrictions Alter Flowers 75 The flowers are purchased and the second part of the transaction is used to let PowerChurch Plus know that the Flowers Restricted area needs to be reduced by $75. The transaction is posted and new reports are run. Balance Sheet - February 3 Assets Checking Accounts $ 11,450 Land & Buildings 50,000 Nursery Equipment 2,000 Total Assets $ 63,450 Liabilities Mortgage $ 16,100 Equity Unrestricted Equity 47,350 Restricted Equity New Cribs - Extra Mortgage Principle - Altar Flowers - Subtotal Restricted Equity - Total Equity 47,350 Total Liabilities & Equity $ 63,450 Income & Expense Statement January 1 - February 3 Income Contribution Income Tithes & Offerings $ 11,800 Restricted Contributions New Cribs 1,950 Extra Mortgage Principle 3,000 Altar Flowers 75 Subtotal Restricted Contributions 5,025 Release from Restrictions Temp Restricted Release New Cribs Release (1,950) Extra Mortgage Release (3,000) Altar Flowers Release (75) Subtotal Temp Restricted (5,025) Released from Restrictions Released from Restrictions 5,025 Subtotal Release from Restrictions - Total Income $ 16,825 Expenses Fixed Expenses Mortgage Interest $ 400 Altar Flowers Expense 75 Total Expenses $ 475 Net Income $ 16,350 Changes in Equity Beginning Income Release from Expenses Ending Balance Restrictions Balance EQUITY 3000 Unrestricted Equity ,000 11,800 5,025 (475) 47,350 Restricted Equity 3200 New Cribs ,950 (1,950) - - Extra Mortgage Payment ,000 (3,000) - - Altar Flowers (75) - TOTAL EQUITY 31,000 16,825 - (475) 47,350 Accounting for Contributions 11

12 In all the examples we have looked at for donor restricted giving, the restricted money was used differently. In the first example, the church bought another asset (the cribs), in the second a liability was reduced (the mortgage), and in the third an expense was incurred (altar flowers) because of the donor restriction. But in each case, we used the same release transaction. Whatever the accounting event that meets the donor restriction, add the transaction as you normally would, but add the release transaction to show that you are using restricted money. The release transaction always debits the specific release account and credits the released from restrictions account. Donor Restricted Contributions - Permanent An endowment is an example of a permanently restricted contribution. Normally the amount received as an endowment is deposited into an investment account and the interest earned in that account can be used for the purpose outlined when the endowment was given. These permanent donor restrictions are handled the same way as temporary restrictions. We will still need three accounts to track each permanent donor restriction. The only difference is each of the accounts will be in the permanent restriction area in our chart of accounts instead of the temporary restriction area. For example, a long time member, Ida Smith, recently passed away. Her will called for an endowment of $500,000 to be established at and the proceeds to be used to send children to church camp. The following accounts were added to the Chart of Accounts to keep track of the new permanent donor restriction. Account Account Name Closes to Smith Endowment Equity Smith Endowment Income Smith Endowment Release To record the endowment, the following journal entry is posted: Investment Account Smith Endowment 500, Smith Endowment Income Smith Endowment 500,000 Accounting for Contributions 12

13 Balance Sheet - February 5 Assets Checking Accounts $ 11,450 Land & Buildings 50,000 Nursery Equipment 2,000 Investment Account 500,000 Total Assets $ 563,450 Liabilities Mortgage $ 16,100 Equity Unrestricted Equity 47,350 Restricted Equity Temporary Restrictions New Cribs - Extra Mortgage Principle - Altar Flowers - Permanent Restrictions Smith Endowment 500,000 Total Equity 547,350 Total Liabilities & Equity $ 563,450 Income & Expense Statement January 1 - February 5 Income Contribution Income Tithes & Offerings $ 11,800 Restricted Contributions Temporary Restrictions New Cribs 1,950 Extra Mortgage Principle 3,000 Altar Flowers 75 Subtotal Temporary Restrictions 5,025 Permanent Restrictions Smith Endowment 500,000 Subtotal Restricted Contributions 505,025 Release from Restrictions Temp Restricted Release New Cribs Release (1,950) Extra Mortgage Release (3,000) Altar Flowers Release (75) Subtotal Temp Restricted (5,025) Permanent Restricted Release Smith Endowment - Released from Restrictions Released from Restrictions 5,025 Subtotal Release from Restrictions - Total Income $ 516,825 Expenses Fixed Expenses Mortgage Interest $ 400 Altar Flowers Expense 75 Total Expenses $ 475 Net Income $ 516,350 Note: There are several accounting and legal issues associated with endowments. This example is for illustration purposes only and is not meant to cover all such issues. Such coverage is beyond the scope of this document. It is highly recommended that your church consult with a qualified accountant and/or attorney before the establishment of any endowment. Accounting for Contributions 13

14 Pass-Thru Contributions Contributions to be passed on to another non-profit organization are called Pass-Thru Contributions. Examples of this type of contribution would be the soup bowl offering from the example in the introduction. Other examples would also include the college choir that sings in the evening service where a special offering is taken for them. To make it easier for people writing checks, all checks are made payable to the church and the church writes one check to the college for the total. This would also be considered a pass-thru contribution. When deciding if a particular donation should be considered a pass-thru contribution, you should look at who is responsible for making sure that the money is spent for tax-exempt purposes. If the church is responsible to make sure that the money is spent for a tax-exempt purpose, then the church should probably recognize the contributions as income. Typically a contribution would only be accounted for as a pass-thru contribution when you turn the money over to another non-profit organization. On February 9 th, the college choir from a local bible college comes and sings for the evening service. A total of $467 is taken up in a love offering. An announcement was made to make all checks payable to. A new liability account is added to the Chart of Accounts to keep track of special offerings: Account Account Name Closes to Special Offerings Liability not applicable A new contribution fund was also added. When this account was added, the credit account was set to the Special Offerings Liability account instead of an income account. The following accounting transaction records the deposit of the love offering Checking Account Choir Love Offering Special Offerings Liability Choir Love Offering 467 Accounting for Contributions 14

15 After posting, a new Balance Sheet and Income & Statements are generated. Balance Sheet - February 9 Assets Checking Accounts $ 11,917 Land & Buildings 50,000 Nursery Equipment 2,000 Investment Account 500,000 Total Assets $ 563,917 Liabilities Mortgage $ 16,100 Special Offerings 467 Total Liabilities 16,567 Equity Unrestrited Equity 47,350 Restricted Equity Temporary Restrictions New Cribs - Extra Mortgage Principle - Altar Flowers - Permanent Restrictions Smith Endowment 500,000 Total Equity 547,350 Total Liabilities & Equity $ 563,917 Income & Expense Statement January 1 - February 9 Income Contribution Income Tithes & Offerings $ 11,800 Restricted Contributions Temporary Restrictions New Cribs 1,950 Extra Mortgage Principle 3,000 Altar Flowers 75 Subtotal Temporary Restrictions 5,025 Permanent Restrictions Smith Endowment 500,000 Subtotal Restricted Contributions 505,025 Release from Restrictions Temp Restricted Release New Cribs Release (1,950) Extra Mortgage Release (3,000) Altar Flowers Release (75) Subtotal Temp Restricted (5,025) Permanent Restricted Release Smith Endowment - Released from Restrictions Released from Restrictions 5,025 Subtotal Release from Restrictions - Total Income $ 516,825 Expenses Fixed Expenses Mortgage Interest $ 400 Altar Flowers Expense 75 Total Expenses $ 475 Net Income $ 516,350 Notice that the Income & Expense Statement did not change. This is because the amount is shown as a liability on s records. Pass-Thru contributions like this are shown as a liability and are not considered income to. When an amount is shown as a liability, it does not flow through the Income & Expense Statement. Later that week, when the check is cut to the college for the amount of the offering, the following journal entry is recorded Special Offerings Liability Choir Love Offering Checking Account Choir Love Offering 467 Notice this transaction is an exact reversal of the original entry. The transaction reduces the bank account by the $467 and pays off the liability amount. Accounting for Contributions 15

16 New reports are run after posting the above entry. Balance Sheet - February 14 Assets Checking Accounts $ 11,450 Land & Buildings 50,000 Nursery Equipment 2,000 Investment Account 500,000 Total Assets $ 563,450 Liabilities Mortgage $ 16,100 Special Offerings - Total Liabilities 16,100 Equity Unrestricted Equity 47,350 Restricted Equity Temporary Restrictions New Cribs - Extra Mortgage Principle - Altar Flowers - Permanent Restrictions Smith Endowment 500,000 Total Equity 547,350 Total Liabilities & Equity $ 563,450 Income & Expense Statement January 1 - February 14 Income Contribution Income Tithes & Offerings $ 11,800 Restricted Contributions Temporary Restrictions New Cribs 1,950 Extra Mortgage Principle 3,000 Altar Flowers 75 Subtotal Temporary Restrictions 5,025 Permanent Restrictions Smith Endowment 500,000 Subtotal Restricted Contributions 505,025 Release from Restrictions Temp Restricted Release New Cribs Release (1,950) Extra Mortgage Release (3,000) Altar Flowers Release (75) Subtotal Temp Restricted (5,025) Permanent Restricted Release Smith Endowment - Released from Restrictions Released from Restrictions 5,025 Subtotal Release from Restrictions - Total Income $ 516,825 Expenses Fixed Expenses Mortgage Interest $ 400 Altar Flowers Expense 75 Total Expenses $ 475 Net Income $ 516,350 Notice the $467 is not shown as an expense for. When the liability is paid it is not to be considered an expense to, just like when the money was received it was not considered income. Accounting for Contributions 16

17 Keeping track of donor restrictions using PowerChurch Plus Right now you are probably thinking that it is a lot of work to keep track of each of these individual donor restricted areas. The good news is that PowerChurch Plus is going to keep track of most of this information for you automatically. PowerChurch Plus has several convenience features to help make the tasks of keeping track of donor restricted money easier: Maintain List of Donor Restrictions Use this data entry screen to list all the current donor restrictions. When you have a new donor restriction, there is an assistant to help you setup the necessary accounts for each restricted area. Release Restricted Funds Assistant This assistant will help you add the release portion of the transaction to your journal entry. It is available on the Enter Transactions, Modify Unposted Transactions, Maintain Open Invoices, Maintain Manual Checks, and Maintain Auto-Repeating Entries screens. Reminders if donor restricted money can be used PowerChurch Plus can remind you to release donor restricted money on accounts you setup. If you have accounts that are normally used with donor-restricted money, PowerChurch Plus can remind you to run the Release Restricted Funds Assistant, when these accounts are used in a transaction. Cash Management Report Use the Cash Management Report to make sure that money that has already been committed to other areas is not used. This report pulls information from the Fund Accounting, Contributions, and Accounts Payable modules to show the account balances after posting has been completed. Changes in Equity Report This is a really easy to understand report that shows the beginning balance, income, and amounts used for each donor restriction. Use this report for the committee that wants to know what the beginning balance was, how much came in, how much was used, and what the ending balance is for each donor restriction. Maintain List of Donor Restrictions The Maintain List of Donor Restrictions screen keeps a list of all your current donor restrictions. This is where you go to tell PowerChurch Plus what donor restrictions you have. Besides the description of the donor restriction, you can add notes specific to this restriction, such as how the donor restriction Keeping track of donor restrictions using PowerChurch Plus 17

18 can be used or the circumstances surrounding the contribution. These notes will be displayed when releasing the entry. This makes it easier to remember the uses of each specific donor restriction. Adding a new donor restriction When you click Add on the Maintain List of Donor Restrictions screen, PowerChurch Plus will display an assistant that will walk you through the six steps of creating a new donor restriction. Each step of the assistant will provide information about the process and type of account that needs to be added. STEP 1: Specify the description of the donor restriction. Enter the name, type, which accounting fund, and any notes about the description. Restriction name The name can be up to 25 characters in length. Enter a descriptive name to refer to this donor restriction. Restriction type Select either Temporarily Restricted, or Permanently Restricted based on the instructions from the donor. Most donor restricted giving is going to be considered temporarily restricted, unless the gift is for an endowment fund or similar type of gift. Accounting fund Enter the accounting fund that is going to keep track of this restriction. Click the magnifying glass or press F2 to select an accounting fund. Notes Enter any needed notes about this restriction. This is a good place to record any information such as how the money is to be used or any additional information needed about this contribution. After completing all the information click Next. For each donor restriction, you will need three accounts: equity, income, and release accounts. In the next three screens, PowerChurch Plus will prompt you for each account in turn. If the account has already been added to you chart of accounts, click the Use existing account check box and select the account from the list. If the account has not been added, enter the account number, description, and level. Keeping track of donor restrictions using PowerChurch Plus 18

19 Step 2: Specify the equity account. The Equity account is used to hold the current balance of the restriction. If the account has already been added, select the Use existing account option and select the account from the list. Otherwise enter the information to add a new account. Click Next. STEP 3: Specify the income account. The income account keeps track of the amounts received for this donor restriction. Again, if the account has already been added to your chart of accounts, check the Use existing account option and select the account from the list. Otherwise enter the information for the new account and click Next. STEP 4: Specify the release account. The release account keeps track of how much money has been used or released for this particular restriction. Again, if the account has already been added to your chart of accounts, check the Use existing account option and select the account from the list. Otherwise enter the information to add a new account and click Next. Keeping track of donor restrictions using PowerChurch Plus 19

20 STEP 5: Specify the expense account. This step is optional and will not be needed for all donor restrictions. If needed, enter information to add a new expense account. If you do not need to add a new expense account, leave the account number blank and just click Next. STEP 6: Specify the contribution fund. Enter the information about the contribution fund used to record donations to this restriction. This step is optional, but it will most likely be used. If the contribution fund has already been added in the contributions module, check the Use existing option and select the contribution fund from the list. Otherwise, enter the information to add a new contribution fund. Click Next. Finish Click Finish and PowerChurch Plus will automatically add the accounts you specified and make sure they are setup correctly to track the donor restriction. That is all there is to adding the new restriction. In one process, PowerChurch Plus helps you create the needed accounts and makes sure that the link from the contributions module to the accounting module is correct as well. Keeping track of donor restrictions using PowerChurch Plus 20

21 Using the Release Restricted Funds Assistant The Release Restricted Funds assistant is used to make sure the release transaction is added to your accounting transaction correctly. This assistant is available on every screen where an accounting transaction can be entered. Whenever you are entering a transaction that needs to release restricted money, just click the Release Restricted Funds button and PowerChurch Plus will launch the assistant. The assistant will list all of the donor restrictions defined in PowerChurch Plus. The notes entered about each restriction appear in the box below the list. Refer to this area to see how a restriction can be used or for more information about a particular restriction. Select the appropriate donor restriction and click Next. Enter the amount of the restriction that is being used as well as any notes as to how the restriction is being used. Click Finish. PowerChurch Plus will add the release entry to your journal transaction and add the notes you entered to the notes for the journal entry as well. You do not have to remember which account needs to be debited or credited for this part of the transaction. Just select the appropriate restriction, enter the amount, and PowerChurch will do the rest. Keeping track of donor restrictions using PowerChurch Plus 21

22 Reminders if donor restricted money can be used In the third example above, restricted money was used to buy flowers for the altar. If restricted money is often used for this purpose, we can tell PowerChurch Plus to remind us about donor restrictions when we use this account. To setup a donor restriction reminder for an account: 1. From the Fund Accounting menu, Select Maintain Chart of Accounts. 2. Use the Locate button to select the account. 3. In the accounting fund where this account uses restricted money, click the details button. PowerChurch Plus displays the account details screen. 4. Click the This account uses restricted money checkbox. Keeping track of donor restrictions using PowerChurch Plus 22

23 5. Click Save to save the changes to the account. Now when this account is used in a transaction, PowerChurch will remind you to check and see if donor restricted money should be released. Reports The following reports show information regarding donor restrictions. Balance Sheet and Balance Sheet by Fund reports Shows the current balance of each donor restricted area in the equity section of the report. Income & Expense and Income & Expense by Fund reports These reports show the amount received for each donor restriction and the amount released during the report period. Statement of Activities report This is the GAAP compliant income statement. This report shows separate columns for unrestricted, temporarily restricted and permanently restricted income. It also shows the amounts released from restrictions as well. Cash Management Report This report is designed to help make sure that money is used for its designated purposes and that cash is available to pay current bills. For more information on this report see your PowerChurch Plus manual. Changes in Equity report Use this report to show the beginning balance of each equity account, the amount received, released and expenses for each account as well. This report is designed for non-accounting people who want to know what the beginning balance is, how much came in, and how much was spent. Accounting Fund Balances report This is another report that shows the current balances of Equity accounts separated by accounting fund. Keeping track of donor restrictions using PowerChurch Plus 23

24 Conclusion Keeping track of donor restrictions can be a detailed task. Using PowerChurch Plus version 9 will make this complex task easier. Using the new features built in to PowerChurch Plus version 9, the only difference in recording a normal accounting transaction that uses unrestricted money and a transaction that uses donor-restricted money is the release portion. To keep track of Donor Restrictions: 1. Add the donor restriction using the Maintain Donor Restrictions dialog in Fund Accounting. 2. Record the income just as you would if there was no donor restriction. 3. Use the Release Restricted Funds assistant when using donor restricted amounts. Record the entry as you normally would in either Accounts Payable or Fund Accounting, and use the Release Restricted Funds assistant to add the release portion to your journal transaction. Without the release portion, PowerChurch Plus will not know that donor restricted money was used. 4. Run the Balance Sheet or Changes in Equity report. These reports will show you the current balances of your donor restrictions. We have looked at the four different types of contributions and the proper way to show them on the church s records. This paper is meant to be just an introduction to the accounting concepts and is not designed to be an exhaustive reference on the proper accounting of donor restrictions. We would encourage your church to find and work with an accountant who is familiar with non-profit accounting. NOTE: In this document, we are only dealing with the accounting treatment of contributions. The legal treatment of donor restricted contributions may be different than the accounting treatment. A good source of information on this topic can be obtained from the Pastor, Church & Law available from Christian Ministry Resources ( Your church may wish to review the applicable laws with a qualified attorney before defining a contribution policy. Conclusion 24

25 Definitions Accounting Fund: An accounting fund is a self balancing chart of accounts. Fund Accounting has traditionally been the way for a non-profit organization, like a church, to segregate resources for specific activities or objectives in accordance with special regulations, restrictions, or limitations. Each fund has assets, liabilities, and a fund balance (equity or net assets), as well as its own revenue and expense accounts. i This method of keeping track of donor restrictions can be used with fund accounting as each fund can have each type of net assets. Contribution: A contribution is a non-reciprocal transfer from one party to another. In other words, the person giving the contribution does not receive anything other than possibly an intangible religious benefit in exchange for their contribution. Most contributions will be in the form of cash, but contributions could also be in the form of property, (i.e. stocks or land) or the forgiveness of a debt (i.e. forgiving a loan the church had taken out from the contributor). If someone receives something in exchange for the money given, it is not considered a contribution. Equity: Equity is the residual interest in the assets of an entity after deduction of its liabilities. Other terms that are often used for equity are Net Assets or Fund Balance. Current accounting trends are for non-profit organizations, like churches, to use the term Net Assets. However, in this paper we use the word Equity because it is the most widely understood term. Donor Condition: A donor condition is when there is a future event whose occurrence or failure to occur releases the donor from its obligation or gives the donor the right to the return of the asset it has given. A donor condition is different than a donor restriction. For example, a donor could place a condition that the church building be painted orange. This would be considered a donor condition. Donor conditions are handled differently than the accounting methods discussed in this paper. If you do have a donor condition, contact a qualified accountant for help with the proper way to report the transactions on your financial statements. i Gregory B Chapin, et al., Accounting and Financial Reporting Guide for Christian Ministries (Washington D.C., Evangelical Joint Accounting Committee, 1994), , PowerChurch Software PowerChurch Software 328 Ridgefield Ct Asheville NC Web Phone info@powerchurch.com (800) or (828) Definitions 25