Look over the following church bookkeeping mistakes and learn how to avoid them.
I have worked with many churches throughout the years and seen quite a few bookkeeping and accounting errors. Most are unintentional and some are harmless, but some of those bookkeeping errors were devastating to the church. See five common bookkeeping errors below...
This is an error I see quite often and can lead to other difficult issues.
Just maintaining a check register is not a reliable bookkeeping system. Suppose your ancient air conditioning system goes out right in the middle of summer and your church doesn't have the cash to replace it, so you have to go to the bank and borrow the money.
Most banks require (current and prior years) Statement of Activity (Income Statement), a Statement of Financial Position (Balance Sheet), and sometimes a Cash Flow Statement.
I have had several individuals call me in a panic and need 3 years of financial reports produced from just a check register. It is a long and tedious process and if you hire someone like me ...it's going to cost you a lot of money ...if you can even find someone to do it (I stay so busy that I can't do that anymore). Combine that with your members not attending because of the heat...and you got a bad situation.
Laying all that aside....another important reason for keeping books...is to make good financial decisions. You need to be able to pull up a report and see that you are spending more on expenses than you were in prior years.
You also need to be able to look at that bank balance and know at a glance how much of it is "designated" funds and how much is left to keep the lights on.
Set up a church bookkeeping system that not only tracks expenses and income, but also tracks your assets and liabilities.
Here is a couple of examples of improperly assigning transactions:
a. Refunds: Don't put on Misc Income...it's not income. Assign it back the expense account the original transactions was assigned to. For example, I was reconciling a client's account the other day and seen where the bank had charged a $50 bank charge and then refunded back $33 of it. My client had properly assigned the $50 to the proper expense account, but had assigned the $33 to Misc. income. That distorted the amount they actually received in donations/income and misrepresented how much was paid in bank fees. Another example, would be if you received a refund for returning the wrong size tablecloths for the Women's Tea event. You would want to assign that deposit back to the expense and FUND of the original purchase, so you can properly track how much was received and spent for that event.
b. Loan payments: Don't assign it all to an expense account. If you have a mortgage or loan...you should be tracking the balance of the liability. The easiest way to keep an accurate running balance of that liability is to split that loan payment between what was actually applied to the principal and what was interest (an expense that shows on the Statement of Activity). If you are using an accounting software, your transaction for a loan payment of $3600 may look something like this:
23941 Mortgage Payable $1400
65010 Interest Expense $2200
Some of my clients have expressed concern regarding this method as it doesn't show that full payment on the Statement of Activity (Income Statement) and in turn does not show what they consider a correct "net balance". However, I always run a Cash Flow Statement along with that report as well as a Statement of Financial Position which will show the current balance of that liability.
The Statement of Cash Flows (SOCF) adjusts that "net balance" from the Statement of Activity (SOA) by deducting or adding any cash transaction that involved your assets or liabilities. So using the example stated above, your SOA may show a net balance of $1,000, but the SOCF will record that $1000 and then deduct the additional $1400 you spent cash on and give you the actual net balance of -$400.
Some bookkeepers will put the entire loan or mortgage payments on the Interest Paid (expense account) and then do a monthly or quarterly journal entry to move the principal amount to the liability account. Even though that method ends up with the same amounts recorded in their proper place at some point in time...it is not the proper GAAP (generally accepted accounting principles) method and may cause some confusion to a banker or accounting professional looking at your financial statements.
Church bookkeeping errors are bound to happen; however, there are some measures you can put into place to catch them.
One of the best practices is to reconcile your bank and credit card accounts MONTHLY.
By reconciling your accounting with your bank and credit card statements, you will find errors such as duplicates, missing transactions, and amount discrepancies.
Aplos has one of the easiest bank reconciliation modules I have ever used , but QBO and other accounting software all have made this monthly chore easier throughout the years. If you are using spreadsheets, it is a little harder...but just as important!
This is the most dangerous church bookkeeping error!
Churches are under most of the same labor and employment laws that "for-profit" organizations are under. This includes the guidelines for classifying your workers as employees or independent contractors.
See those guidelines in the this article on Misclassification of Workers.
Churches can and do get slapped with devastating penalties for classifying and paying a worker with a 1099 ...that the IRS deems should have been classified as an employee.
The tip to avoid this church bookkeeping error is to go ahead and classify and pay your worker as an employee...if there is any doubt on their classification.
The majority of my clients are small churches. I belong to and am Treasurer of my own small church...so I understand the financial struggles of small churches.
Hiring a "experienced" bookkeeper is not very high on their list of necessities. So the Pastor either does the bookkeeping themselves or corrals a member with some "financial" or "organizational" skills and turns it over to them.
The problem is that neither the Pastor nor the good hearted volunteer may know how to set up and maintain a proper accounting system, so you end up with an ineffective accounting system...and may not even realize it...until you have bills not being paid, or doubled paid...or financial records that nobody can make sense of...or make proper financial decisions with.
I'm not saying that you cannot do it yourself, but if that is the only option...get my Church Accounting How To book or Church Accounting Package (digital). Research everything you can find on accounting for a church!
Very important! If you decide to use QuickBooks Online (can get QBO free thru TechSoup)...PLEASE get Lisa London's book on how to set up QBO for a church or better yet...take her online courses for setting up and using QBO for a church. QuickBooks is great software for a small business...but you definitely have to learn some "workarounds" for using for a church. I have seen some SCARY BAD QBO files set up incorrectly for churches! Tip...a 109 classes is TOO many!
Aplos is great software for small churches...but even it can be "messed up" by someone that doesn't know what they are doing.
If you can't afford an experienced bookkeeper (by the way ...just because a bookkeeping firm states they know how to handle bookkeeping for a church...doesn't mean they can. Just spent the last 2 months cleaning up a QBO file that an "experienced" bookkeeper set up for a church) ...
consider hiring a CPA to do a quarterly or annual review of your bookkeeping ...
OR hire a bookkeeping firm like mine =) to do monthly or quarterly support services.
Do you have a comment on bookkeeping that may help other churches and nonprofits? Share it!