Fund Accounting Basics

Method of Accounting for Nonprofits and Churches

Fund accounting is an accounting method that groups assets and liabilities according to the specific purpose for which they are to be used It keeps restricted and unrestricted funds separate for churches and nonprofits.

Fund Accounting with SFAS 117:

Fund Accounting Basics

In the mid 1990’s, the Financial Accounting Standards Board (FASB) issued the Statement of Financial Accounting Standards (SFAS) Numbers 95, 116, 117, and 124. 

They describe the way nonprofits should account for contributions, present their financial statements, and account for  certain investments.

A few years ago the FASB organized all these accounting standards for nongovernmental organizations, including churches and nonprofits together under one title: FASB ASC Topic 958, Not-For-Profit Entities. 

It didn't change any of the accounting standards for churches, just tried to simplify them by putting them all together under one topic. 

The emphasis of the SFAS financial statement reporting is now on “net assets” classification, rather than tracking each fund. (Net assets means more or less the same as owner’s equity or net worth in a for-profit business.)

Update August 18,2016:

The FASB released Accounting Standards Update (ASU) 2016-14 that changes the way nonprofit organizations including churches ... classify net assets and prepare financial statements. These new standards will apply to annual financial statements issued for fiscal years beginning after December 15, 2017. See details below!

Church Accounting Package

A set of 4 ebooks that covers the following topics...

  • Fund Accounting Examples and Explanations
  • Setting up a fund accounting system
  • Donation management
  • Minister compensation and taxes
  • Internal controls and staff reimbursements
  • Much more - Click here for details

The net asset categories were:

  • Unrestricted: These funds are donations that are available to use toward any purpose. Unrestricted funds usually go toward the operating expenses of the organization.
  • Temporary Restricted: These funds may be restricted by purpose or time, but the restrictions are not permanent. An example of a purpose-restricted gift is a gift for a certain project or for the purchase of equipment. An example of a time-restricted gift is a contribution of a trust, annuity, or term endowment where the principal of the gift is restricted for a certain term of time.
  • Permanently Restricted: These funds are gifts restricted by a donor for a designated purpose or time restriction that will never expire. An example is an endowment gift with the stipulation that the principal is permanently unavailable for spending, but the investment income from the principal may be used in current operations.

Net assets can now be combined into these three categories and you are no longer required to track each fund individually.

UPDATE: FASB released new standards for classifying assets and preparing financial statements on August 18, 2016!

Instead of the the three categories listed above, there will now only be two classifications:

  • Net assets without donor restrictions
  • Net assets with donor restrictions

Footnote disclosures will now be required on financial statemtents to increase the reader's understanding. See what those footnotes should include as well as more details on this update on Not-For-Profit (NFP) Financial Reporting : Accounting Standards Update (Click on the Update 2016-14)

However, SFAS 117 and its update did not do away with accounting for funds as it concerns only financial statements, not reports used internally.

If your church does not need to report to outside agencies, you probably do not have to follow all of the specifics of the above SFAS. If you are required to have an outside audit by a donor, bank, or other organization, you will need to work with your accountant to determine how to make your financial statements GAAP compliant.

Some small churches find that tracking their financial activities internally is easier if they stay with the traditional fund accounting method. With this form of accounting you will produce reports that detail expenditures and revenues for multiple funds.

For may have one fund account titled "General Fund" which all unrestricted funds (net assets without donor restrictions) pass through.

Then you may have several more accounts titled "Missions", "Building Fund", etc. which restricted funds ( net assets with donor restrictions) pass through. These are funds that are set aside for a specific purpose.

Church accounting is extremely accurate, and a necessary component to any church or nonprofits financial records. However, there can be a dangerous side to it. See more on this church fund accounting guide.

Fund Accounting Tips:

Tip #1 -Do not set up "too many" funds! It makes accounting tougher then it should be. If you are using specialized fund accounting software such as Alpos, use tags to track ministries such as Youth, Women's, Men's, etc. Consider using "Products and Services" (items) in QuickBooks Online and Desktop to track some of those donor restricted funds. Purchase QuickBooks for Churches for more detail! Click here for that book and  a complete listing of the Accountant Beside You "How To" books. 

Tip #2 - Do not open "too many" bank accounts! A common misconception is that you must open separate bank accounts for each fund. You don't need to.

Now that's not saying you CANNOT open separate accounts...just that there is better ways to handle multiple funds.

All funds can be placed in one bank account as long as your accounting system clearly documents net assets and liabilities in each fund apart from your operational cash flow (general fund). must be able to produce reports that summarize the financial activities of the church or nonprofit with all of your funds.

Tip #3 - KISS (Keep it Super Simple)! You can set your church or nonprofit accounting up on paper, in spreadsheets, or through a church accounting software. No matter how you choose to set it is very important to keep it simple. Remember that your set up may go through multiple volunteers or staff. It should be simple enough that the next person can step in and take over without having to learn how your complex accounting system works.

Tip #4 - Your financial administrators MUST understand the underlying concepts of nonprofit accounting and accurate financial statement preparation which is covered in the Basic Fund Accounting ebook.

See more on nonprofit accounting: Guide to Fund Accounting

Want to set up QuickBooks Online for your church or nonprofit, but do not know where to even begin? Let Lisa London, CPA and author of QuickBooks for Churches and Nonprofits, take you step by step through setting it up and using QBO for your church or nonprofit organization in her online courses!

I highly recommend "The Accountant Beside You" QB ONLINE COURSES 

*Use the discount code FCA for a 10% savings!


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Accounting Questions and Comments

Do you have a question or comment regarding the accounting issues churches and nonprofits face? Share it!

Fund Accounting Reader Comments

The following comments, tips, and Q/A were provided by FreeChurchAccounting's wonderful readers:

Does my church have to file a 990-T or any tax form for profit from an investment used to further its nonprofit mission? 
Does my church have to file a 990-T or any tax form for profit from an investment used to further its nonprofit mission?

Accounting for Contributions earmarked for a specific project 
With regards to the Main Question above, should such earmarked contributions be taken to Income or would it be acceptable to treat it as a Special Fund …

procedure for booking fund income & expenses 
When funds are deposited to the general account, is the opposite entry to an income account? When funds are dispersed from the general account for a …

Do any other churches out there utilize a "IN/OUT" Fund for monies that pass through the accounting system? 
In a previous church as the Business Administrator our system had a fund set up for pass-through monies. For example, Altar Flowers, people paid for them …

Accounting for church building fund  
1. What is the accounting entry to record cash received for church building fund? 2. Is this fund reported as income in the income statement?

Principal payment from designated fund 
I am making a principal loan payment. I am crediting operating account, debiting designated fund. I am creating the journal entry to reduce the long term …

Recording the Initial Deposit Acquired via a Loan 
Our church has taken out a loan for some building improvements. Obviously, we've recorded the debit to cash and credit to a new Loan Liability account. …

Reduction of expense or revenue? 
Can I record funds raised or donated for a mission trip as reduction of expense rather than income?

How do I handle a savings account in fund accounting? 
Our church has a savings account. How do we handle this? Could it be considered a fund?

Electronic pledge payments 
We have a number of members using the electronic payment system. As treasurer, I feel that people should set up their own payments, I am not comfortable …

Senior Pastor Bonus 
As part of the hiring package, our senior pastor was offered an annual bonus, based on YE "net income" if applicable. How is this posted in quickbooks? …

Recording and reporting of depreciation under fund accounting using QuickBooks 
"Capital asset fund reports assets, liabilities, revenue and expenses related to the acquisition and amortization of capital assets." This is written …

Fixed Asset or Expense? 
We are a non profit church , about to purchase a building on which we will be making some general improvements (bring building up to code, carpet, pews, …

Cash vs. Accrual 
Does fund accounting dictate whether to use cash or accrual accounting. We are a growing church and making the transition from cash to accrual but in …

Church savings account?? 
I was told that since our church is non profit that at the end of the year we have to have a zero balance .. And that any money left on our savings account …

How to zero out a fund balance account 
Does anyone know if there's a way to zero out a fund balance account without showing false income? My program is an old version of Money Counts so I'm …

Transitioning from Traditional Accounting to Fund Accounting Software 
Last year our small church began using Sage (formerly Simply Accounting) to do our bookkeeping. I have no bookkeeping experience an unfortunately I had …

capturing donor data 
I am new at this and trying to establish some best practice guidelines. Who is writing down/inputting the donor name, amount given, etc. The counters …

WMU keeping contributions 
I'm the financial secretary for a small 100 member church so all contributions end up being entered into the accounting system by me. I just found …

Deposit practices  
We have a congregation of 75, we have three offering counters, all money is recorded on Sunday and placed in the safe for deposit on Monday. The person …

Reserve Funds  
How can I reserve funds to another checking account without affecting my profit and loss in quickbooks? We would like to set aside these extra funds that …

bank account signatures 
When is it appropriate to add the pastor's signature to the bank account.

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Maintaining a balance sheet 
My church is small, and we use a form of fund accounting. One of our members who has had experience in running a business insists that we maintain a balance …

A check of $50,000 as a pass through for tax exemption to the donor 
A corporation which puts on musicals and plays and which is filing for but not as yet has tax exempt status, asked our church to be the recipient of a …

How to Handle Payments for Functions that are not a budgeted Item 
Our Church District holds a senior luncheon every year and one party pays the District for everyone's lunch. However, this year some of the attendees …

Is it appropriate for the church finance team to include an endowment fund managed by a separate board of trustees in the church's financial statement? …

Fixed Assets 
How may Church Fixed Assets be categorized/classifeid on the Balance Sheet. They comprise of: Land & Buildings Automobiles Furniture & Fixtures Eqipment …

Accounts for AGM 
Do the accounts have to signed by a qualified accountant? I worked as book keeper and usually pass over to accountant but they are starting to charge …

Anonymous gifts posted to financial statements 
If an anonymous gift is given through the church for a church member and a check is written to that member, how should that expense be reported on the …

Temporarily Restricted Net Assets 
I'm a fresh-out-of-college accountant with not a whole lot of real world accounting experience. I've been the church bookkeeper a couple years now and …

Transitioning record-keeping 
This is such a helpful site. Thank you so much. Exactly what I’ve been looking for. I’ve just joined the board of my small church (+/- 75 attendees) …

Can building proceeds be put into general fund? 
During our church's growth, a building fund was established. A building was purchased a few years ago. Following the building purchase, we started in …

pass-through contributions and FASB 136 
Does FASB 136 apply to Churches?

Designated Funds 
Do we spend designated funds before the budget line funds are spent each year? I can't find that anywhere in these accounting procedures. Thanks.

setting up procedures for restricted cash 
Looking for procedures for setting up restricted cash reserve. We need wording for the restricted cash procedure for our church. We have received some …

Record the transfer of money from checking to savings 
We needed to transfer money from our Parish Savings acct to our Parish Checking acct in order to cover some misc. bills/payroll. Is this entry just a …

Sample Chart of Accounts 
Just got your accounting package and am trying to work through set up for fund accounting. Any chance you have a sample church Chart of Accounts I could …

If a village received a gift of a new fire engine from a local civic group. the fair value of this fire engine was $400,000. the entry to be made in the …

Quickbooks nonprofit clarification 
We have purchased 2012 quickbook nonprofit. The language is so different for us to know how to begin using it. Why doesn't it use words that are associated …

Fund Accounting 
Are churches still required to use fund accounting? If not, where does it state that, so I can print a copy for my records?

Can you do Fund Accounting in Quickbooks Pro?  
I am using Quickbooks Pro 2011. I do not have the one for non-profits. My question is can I set up fund accounting in Quickbooks Pro? If so, can someone …

Closing Books 
Giving has been down this year for our church and expenses are up, it is looking more and more like we will be over budget at the end of the year. …

We currently collect money as a church on a monthly basis for a benevolent nonprofit organization and mail the checks made out to that organization directly …

When to use double accounting system 
Is there a budget threshold that triggers a requirement to use double entry system? Our expense budget is about $370,000 annually. Thanks. Know

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mortgage payment transaction posting in fund accounting 
What is the proper way to post a church mortgage payment to the ledger? I know that the standard procedure in for-profit accounting is NOT expense the …

Presentation of Building Fund Bank Account 
Building Fund is a specific fund to be used for acquisition or construction building that will mainly used for education purpose. While accumulating this …

Single-entry accounting and General Ledger for a small church 
I am an auditor for our small church, and I uncovered questionable spending practices by the now former Treasurer who is not forthcoming with records which …

Legal Question about fund accounting 
Is it illegal for a church to use money from another fund temporarily.For example,our church's general fund is out of money,but we still have money in …

Accounting for Gifts 
Our church was given two cemetery plots worth, at the time, $2,500. Do we carry these on the books at $2,500 or do we find out what the value is today …

Fund accounting through Quick Books? 
I recently took over a part time treasurer position at our church. The previous treasurer has used Quick Books for most of the accounting but keeps a …

Journal entry for Building 
I am doing a church's accounting. It is non-profit and fund accounting. The Building is completely paid off but is not on the balance sheet for what …

Building Fund 
Can utilities be paid out of the building fund account?

CD Interest 
80 years ago someone gave our church a monetary gift that was to be invested and the interest used to help pay the pastor's salary. Over the years the …

Separation of duties 
Should the same person sign checks and count the money? Answer Not if you can help it. Sometimes you have no choice while your church is growing. …

Journal Entry for Fixed Assets  
WHAT IS THE JOURNAL ENTRY FOR FIXED ASSETS PURCHASE USING DONATED FUND? Answer Debit the appropriate fixed asset account and …

Management overriding controls 
I work part time as the bookkeeper for a church reporting to the senior pastor. I am a retired accountant having spent 38 years in aerospace accounting, …

Missions Trip 
A few members of my church are participating in an upcoming missions trip. There are fees associated with this trip that each member is responsible for. …

Legality of copying donor checks 
In order to facilitate the ability to record donor information, we copy donor checks, place them in a bank safety sealed pouch, and hand them to our church …

Posting Interest on CDs 
I inherited the policies of this church and was not here when the system was set-up The church uses fund accounting and everything goes pretty smoothly. …

Fixed Asset Depreciation 
I have bought some furniture and mini bus for our small church. As far as accounting is concerned these are classified as fixed assets. 1. How do I …

Reporting Temporary Restricted Funds 
Is it necessary to report Temporary Restricted Funds in the Income Statement?

Building Maintenance Reserve 
We want to set aside a portion of rental income each month into a reserve account for building repair. What is the proper way to do this? Answer

Endowment Fund 
We are just converting to fund accounting and is in the process of determining the starting fund balances for 2010. 1. Is it correct to use the 2010 …

Recognizing Income from an Unrestricted Gift 
My church received an unrestricted special gift. Is it okay for 20% of the gift to be recognized as unrestricted income in the general fund and the remainder …

General Fund and Subaccount Procedures 
Is it legal and/or ethical to deposit money taken in as a "general tithe" to be placed in a subaccount of the church designated for example: Kitchen Fund, …

Too Many Funds 
Question regarding fund accounting: When I first set up the chart of accounts in the software my church uses, Power Church Plus, I created fund numbers …

Dissolution of a Building Fund 
We are a small church and the elder board has decided to dissolve the building fund. Are there any legal ramifications? What procedures need to be followed …

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Fund Accounting Initial Set-up 
Question regarding setting up for fund accounting: I just bought your Basic Church Accounting and Fund Accounting eBooks and they were very helpful …

Property Taxes Debit? Credit? 
Question regarding correct posting of property taxes: If our church makes deposits into a savings account throughout the year weekly to help save for …

Depreciation - Balance sheet only or can I use Profit and Loss? 
Question regarding depreciation. I need some advice regarding Fund Accounting. I use a software package that allows me to depreciate my fixed assets, …

Why Should You Keep Accounting Records? 
How and why should churches keep accounting records? Answer : Why? Before making a major cash purchase for your church, you need to know the …

Cash Accounting Basis for Our Small Church? 
I have a fundamental question with regard to the use of a cash accounting basis for our small church in Washington, DC. Is it appropriate to use a …

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The comments above are for general information purposes only and do not constitute legal or other professional advice on any subject matter. See full disclaimer.

If you want to DIY your payroll, I highly recommend you look at using Gusto! It is very user friendly and their support is awesome! Plus they know how to set up and maintain payrolls for churches and nonprofit organizations.

Note: I am a "partner" of Gusto, but as I have told you before ... I never recommend anything that we or our clients have not tried and love =)

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