A Quick Guide To Church Accounting

Maybe you’re a church bookkeeper wondering how you’ll ensure your church’s finances are managed well. Or you might be a church leader who wants to get a broad overview of how your church accounting system should work so you can hire the right church bookkeeper. Though it can be challenging to track donations and expenses, follow tax exemption guidelines, ensure tax audit readiness, resolve ministerial tax issues, and much more, church accounting is the engine that supports effective and scalable ministries and church programs.

In this guide, I explain the basics of church accounting and list ways you can keep your bookkeeping organized and efficient so your ministry isn’t impacted by financial chaos. 

What is church accounting? 

At a basic level, church accounting is managing a church’s financial resources and accounting processes. This includes recording income (like donations and tithes) and expenses (like salaries and utilities). If you’re a church bookkeeper, your list of duties and responsibilities includes some or all of the following: 

• Tracking and recording tithes, offerings, and donations 
• Managing and reconciling bank accounts 
• Preparing and presenting financial reports (balance sheet, income statement, cash flow statement) 
• Creating and monitoring church budgets 
• Processing payroll for church staff and clergy 
• Handling accounts payable and receivable 
• Maintaining accurate records of church assets and liabilities 
• Ensuring compliance with tax regulations and filing requirements 
• Providing donation receipts and contribution statements to donors 
• Managing designated funds and restricted donations 
• Overseeing the annual financial audit process 
• Implementing and maintaining internal financial controls 
• Analyzing financial data to identify trends and make informed decisions 
• Assisting with the development of long-term financial plans and strategies 
• Managing church investment accounts and endowments 
• Handling employee benefits, such as health insurance and retirement plans 
• Preparing and filing Form W-2 for employees and Form 1099 for independent contractors 
• Tracking and reporting the use of designated funds for specific projects or missions 
• Maintaining accurate records of church property and equipment 
• Providing financial guidance and support to church leadership and committees 
• Developing and implementing financial policies and procedures 
• Ensuring proper segregation of duties to prevent fraud and errors 
• Assisting with grant applications and reporting requirements 
• Managing church credit card accounts and expense reimbursements 
• Staying up-to-date with changes in accounting standards and tax laws affecting churches. 

Key financial statements for churches 

Your church’s financial statements help you understand your overall financial position and performance. The basic financial statements for a church include the statement of activities, statement of financial position, and statement of cash flows. Depending on its accounting needs, a church may also have custom church financial reports like budget-to-actual, account transaction details reports and others. 

Statement of Activity (Revenues and Expenses) 

Also called an income statement or statement of operations, this statement summarizes the church’s revenues and expenses over a specific period, usually a month or a year. With a statement of activity, you can view income from tithes, offerings, donations, as well as investment income. You can also see a breakdown of church expenses like salaries, utilities, ministry expenses, and administrative costs. This helps you decide if your church is operating in a surplus (where revenues exceed expenses) or has a deficit (where expenses exceed revenues) within a specific reporting period. 

Statement of financial position 

Also called a balance sheet, this document shows your financial health related to assets, liabilities, and equity.‍ This statement can be particularly helpful when you want to see individual fund balances for your church. 

Statement of cash flows 

This church financial statement summarizes cash receipts for payments and donations that your church received during a specific period, such as a month or year. This report can be particularly helpful if your church uses credit cards, makes payments on liabilities, or has purchased assets.  

Church accounting and bookkeeping responsibilities  

While most churches have a bookkeeper, some may also have a church accountant. Typically, the church bookkeeper will fill both the role of a bookkeeper and an accountant for their church, particularly since these duties overlap in some areas. Here are the typical responsibilities of a church accountant or church bookkeeper: 

• Maintaining and reconciling financial records: This includes recording income, such as donations and tithes, and expenses, such as salaries and utilities. The accountant may also be responsible for reconciling bank accounts and credit card statements. ‍
• Preparing financial statements: This includes generating balance sheets, income statements, and other financial reports that provide information about the church’s financial health. ‍
• Managing membership records: This may involve tracking membership information, such as contact information and donations, for tax purposes and the church’s records. ‍
• Providing financial guidance: The accountant may be responsible for advising the church on financial matters, such as budgeting and investment decisions. ‍
• Ensuring compliance with financial regulations: This may include following proper donation receipt procedures, adhering to tax laws and reporting requirements, and implementing financial controls to prevent errors and fraud. ‍
• Providing support for audits: The accountant may be involved in preparing for and supporting audits of the church’s financial records. ‍
• Advising on fundraising strategies: The accountant may be involved in developing and implementing fundraising strategies that are aligned with the church’s financial goals. 

Best practices for successful church accounting and financial stewardship 

Proper accounting and bookkeeping practices are essential for the financial health and stability of any church. A well-designed accounting system not only helps churches keep track of their finances but also ensures transparency, accountability, and compliance with legal and regulatory requirements. A good system also allows church leadership to make informed decisions, plan for the future, and demonstrate financial stewardship over the resources entrusted to them by their congregants and donors. 

Set up a church budget 

A good church budget serves as a roadmap for the church’s financial activities, helping to allocate resources, monitor expenses, and ensure that the church’s financial goals and priorities are met. 

• Assess your church’s financial goals and priorities: This involves identifying the key ministries, programs, and initiatives that the church wants to support and determining the resources needed to achieve these objectives. It’s essential to align the budget with the church’s mission and values to ensure that financial decisions are consistent with the church’s purpose. 
• Review the previous year’s income and expenses: This information can help identify trends, anticipate future needs, and make informed projections for the coming year. This will also rein in any ambitious budgets you might unintentionally create. When estimating expected income, consider sources such as tithes, offerings, donations, and any other revenue streams unique to your church.  
• Determine your church’s fixed and variable expenses. Fixed expenses are costs that remain relatively constant, such as salaries, utilities, and insurance premiums. Variable expenses are costs that fluctuate based on your church’s activities and programs, such as ministry supplies, event costs, and outreach initiatives. 
• Allocate funds to specific ministries, programs, and initiatives: This process may involve collaboration with ministry leaders to understand their needs and ensure that resources are distributed effectively. One quick note: Ensure your proposed church budget aligns with your church’s mission and values. A good church budget supports your church’s purpose and helps communicate your church’s priorities to the congregation and other stakeholders. 
• Present it to church leadership for approval: This may involve a formal review process, including discussions and revisions based on feedback from key decision-makers. This process can involve many challenges and hurdles for a church bookkeeper but it can be done. Some key advice during this stage is to clearly communicate, present information as visually as possible, and be prepared to provide your reasoning and justification behind the budget you’ve created. 
• Regularly review and adjust the budget based on actual income and expenses: This allows your church to adapt to changing circumstances, address any unexpected financial challenges, and ensure that your church remains on track to meet its financial goals. 

Choose your church accounting software 

Implementing the right church accounting software can streamline financial processes, reduce errors, and provide valuable insights for church leadership. There are various options for church accounting software available but the most popular options are Aplos and QuickBooks Online for churches.  

Setting up multiple ledgers for church accounting 

Churches use multiple ledgers to clearly organize and report on financial information related to various funds for church programs, ministries, and initiatives. With multiple ledgers, churches can provide detailed financial reports for each area of ministry or project. This level of transparency enhances trust among congregants and demonstrates good stewardship of church resources. Multiple ledgers also help church bookkeepers keep restricted funds separate from unrestricted funds to comply with donor requirements. 

• Appoint a church accountant or bookkeeper to oversee your church’s accounts. This is a critical step that ensures you are entrusting your church’s finances to a capable and trustworthy person.‍ 
• Establish a system for collecting donations and making payments. This includes steps like using church accounting software and establishing a bank account specifically for church funds. Your church treasurer should also set up transaction records to keep track of donations received and expenses incurred. ‍ 
• Create policies and procedures for handling church finances. This means establishing protocols for how the use of church funds is authorized, as well as how expenses are tracked and recorded. You should also be sure to review your church’s financial statements regularly.‍ 
• Stay organized and up-to-date with church accounting records. From recording donations and expenses to tracking any investments made with church funds, regularly reviewing your church’s financial performance and accounting processes will keep you on track for success. 

Best accounting practices for churches 

By following best practices for accounting, a church can better manage its financial resources, comply with regulatory requirements, and maintain transparency and accountability to its stakeholders. 

Create an annual budget 

An annual budget helps your church manage its financial resources and make informed decisions about its financial management. Here are some steps that your church can follow to create an annual budget: 

• Review the previous year’s budget: It’s a good idea to start by reviewing your church’s previous year’s budget to see what worked well and what could be improved upon. This can help identify any trends or patterns in your church’s financial activities and inform the development of the new budget. 
• Determine your church’s financial goals: The church should consider its overall financial goals for the upcoming year and how they align with its mission and vision. This can help guide the budget planning process and ensure that the budget is aligned with the church’s priorities. 
• Estimate income: You should estimate your church’s expected income for the upcoming year based on its previous year’s income and any planned changes. This might include donations, tithes, fundraising activities, and any other sources of income. 
• Identify and estimate expenses: Your church should identify and estimate its expected expenses for the upcoming year, including both fixed and variable expenses. Fixed expenses are those that do not change from month to month, such as rent or mortgage payments. Variable expenses are those that can fluctuate, such as utilities or supplies. 
• Compare income and expenses: You should compare your church’s estimated income and expenses to ensure that its budget is balanced. If the expenses exceed the income, the church may need to make adjustments, such as reducing expenses or increasing income. 
• Review and revise the budget: It’s best to review and revise the budget as needed based on any changes or unexpected events that may occur during the year. It’s a good idea to review the budget regularly, such as quarterly or semi-annually, to ensure that it remains accurate and aligned with your church’s financial goals. 

Use church accounting software 

Here are some traits of good church accounting software: 

1. Ease of use: A good church accounting software should be easy to use, with a user-friendly interface and clear instructions for performing various tasks. This can help minimize the learning curve and ensure that church staff can quickly and easily perform their duties. 
2. Customization: A good church accounting software should allow users to customize various aspects of the software, such as setting up different categories for income and expenses, creating custom reports, and setting up user permissions. This can help the software meet the specific needs of your church and streamline financial management. 
3. Integration with other tools: A good church accounting software should be able to integrate with other tools that your church uses, such as a database of members or a calendar of events. This can help you streamline church operations and avoid the need for manual data entry into multiple systems. 
4. Security: A good church accounting software should prioritize security and protect sensitive financial data from unauthorized access. This might include measures such as encryption, two-factor authentication, and regular backups. 
5. Support: A good church accounting software should offer comprehensive support, including documentation, tutorials, and customer service, to help users troubleshoot any issues that may arise. 

Craft a fundraising plan 

A fundraising plan is a strategic plan that outlines the steps a church will take to raise money for a specific purpose or project. Here are some steps that a church can follow to create a fundraising plan: 

6. Determine the purpose of the fundraising: The first thing to do is identify the purpose of the fundraising and what it hopes to achieve with the funds raised. This could be for a specific project, such as a building renovation, or for general operating expenses. 
7. Set fundraising goals: Your church should set specific, measurable, achievable, relevant, and time-bound (SMART) goals for its fundraising efforts. This will help you track your progress and determine whether your church is meeting fundraising goals. 
8. Identify potential donors: Your church should identify potential donors based on their previous giving history, their relationship with the church, and their capacity to give. This can help your church tailor its fundraising efforts and prioritize its outreach efforts. 
9. Determine fundraising methods: The church should determine the most effective methods for raising funds based on its goals, target audience, and resources. This might include traditional methods such as direct mail campaigns or online giving platforms, as well as creative methods such as fundraising events or crowdfunding campaigns. 
10. Create a budget: The church should create a budget for its fundraising efforts, including any costs associated with the fundraising methods it has chosen (e.g., printing costs for direct mail campaigns). This will help the church track its expenses and ensure that it is using its resources effectively. 
11. Implement and track the plan: The church should implement its fundraising plan and track its progress using tools such as fundraising software or a spreadsheet. This will help the church identify any areas that need improvement and make any necessary adjustments to its plan. 

File appropriate tax forms 

Churches, like other nonprofit organizations, are generally exempt from federal income tax. However, they still have certain tax responsibilities that they must fulfill in order to maintain their tax-exempt status. Here are some of the tax responsibilities of churches: 

• Filing tax returns: Churches are generally required to file an annual tax return (Form 990) with the Internal Revenue Service (IRS). This form provides information about the church’s financial activities, such as its income, expenses, and assets. 
• Paying employment taxes: If a church has employees, it is responsible for withholding and paying employment taxes, such as Social Security, Medicare, and federal income tax, on their behalf. The church is also responsible for paying unemployment insurance taxes and employee benefit plan taxes. 
• Reporting unrelated business income: If a church generates income from a trade or business that is not substantially related to its exempt purpose, it may be subject to tax on that income. This is known as unrelated business income (UBI). The church is responsible for reporting any UBI on its tax return and paying any applicable taxes. 
• Maintaining records: Churches are required to maintain accurate and complete records of their financial transactions and activities in order to support their tax-exempt status. This includes keeping records of donations and fundraising activities, as well as records of expenses and income. 

Set up proper internal controls 

Internal controls are the procedures and policies that a church puts in place to safeguard its assets, ensure the accuracy and reliability of its financial records, and prevent fraud or errors. Here are some steps that a church can follow to set up internal controls in its accounting: 

• Assign responsibilities: The church should clearly assign responsibilities for financial tasks to specific individuals or groups within the church. This can help ensure that tasks are completed accurately and timely, and can help prevent fraud or errors. 
• Establish separation of duties: The church should establish separation of duties for critical financial tasks, such as authorizing transactions, recording transactions, and reconciling bank statements. This can help prevent errors or fraud by ensuring that no single individual has complete control over a financial process. 
• Implement control procedures: The church should implement control procedures, such as requiring dual signatures on checks or establishing approval levels for financial transactions, to ensure that financial activities are properly authorized and monitored. ‍
• Use technology to enhance controls: The church can use technology, such as accounting software or digital signatures, to enhance its internal controls and make financial processes more efficient and secure. ‍
• Regularly review and update controls: The church should regularly review and update its internal controls to ensure that they are effective and aligned with the church’s needs. This might include performing audits or risk assessments to identify any weaknesses in the controls. 

Do you need church accounting services?

From tracking donations and program expenses and ensuring Form 990 compliance to managing donors and other church accounting duties, it can be challenging to stay on top of it. That’s why churches throughout California have supported their bookkeeper with our church accounting and bookkeeping support. Our dedicated team of professionals helps your church streamline financial processes, maintain tax compliance, and maintain financial transparency and accountability. Contact us today to learn how our church accounting services can alleviate your financial challenges and help your ministry thrive.