Understanding Financial Statements
Preparing and understanding financial statements for a church or
nonprofit organization is easier if you follow this simple rule:
For example, preparing a financial report to turn into your bank
would be much more detailed than the report you would prepare for your
church membership or department head in a nonprofit.
You might also be required to prepare your financial statements using the Statement of Financial Accounting Standards (SFAS) Numbers 116 and 117, which describes the way nonprofits should account for contributions, and present their financial statements.
Basis for preparing and understanding financial statements:
- be easy to read so any person studying them will understand your organization’s financial picture;
- be brief and to the point so that the person studying them doesn’t get lost in the details;
- cover all the activities of the organization;
- have a comparison such as a budget or data from a corresponding period of the previous year;
- be prepared in a timely manner.
A financial report for your church members will usually just consist of the contributions and expenses. Financial reports for department heads in a nonprofit might only contain information relating to their department. However, most financial statements are prepared for the church board or governing body and financial institutions.
The principal financial statements for a church or small nonprofit are the Statement of Activity (and the Statement of Financial Position (Balance Sheet). The Statement of Cash Flows is sometimes required for larger churches and nonprofits.
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 order in which the statements are normally prepared and the nature
of the data presented in each statement are as follows:
Statement of Activity
(Statement of Revenue and Expense)—a summary of your organization’s
support and revenue, expenses, and changes in net assets for a specific
period of time, such as a month or year. The Statement of Activity, also known as the Statement of Revenue and Expenses, reflects a church or nonprofits' support and revenue, expenses, and changes in net assets (fund balances) for a certain period of time such as month, quarter, or year.
It shows the church or nonprofit’s source of income and how they used their resources. The form of the statement will depend on the type and size of an organization and the accounting method used.
Statement of Financial Position
(Balance Sheet) — shows assets, liabilities, and net assets as of the end of a period such as a month, quarter, or year. Because it shows how the two sides of the accounting equation
(Assets –Liabilities = Net Assets) it is often referred to as a balance sheet.
Statement of Cash Flows
—a summary of the cash receipts and cash payments for a specific period of time, such as a month or a year. If you use credit cards, make payments on liabilities, or purchase assets...this statement should always be part of your reporting package! It takes the "net income" from the Statement of Activity and adds or takes away anything involving cash...such as the principal part of your loan payments.
*Learn more about understanding financial statements for churches, recording financial transactions, and basic accounting concepts in my Basic Fund Accounting ebook in the Church Accounting Package.
Before you generate your financial statements, there is a process you should go through to ensure the accounting reports you give your pastor, treasurer, or governing council is accurate and complete...
Financial Statements Preparation
Additional Financial Reports
Some additional reports that I like to include in my client's bookkeeping reports are:
- Budget to Actual: This report is essential for those churches and nonprofits that take the time to create a budget. It shows the difference between what you budgeted for and your actual expenses and donations. It provide crucial information for administrators.
- Account Transaction Detail Report: Details out transactions by account. Don't go into a board meeting without one! You need to be able to give a detailed answer when one of the governing body asks you why office supplies doubled this month compared to last month or why the Youth Ministry expenses went over budget. It is a simple report to run in most accounting software. See how to generate a Transaction Detail report in Aplos.
- Donation Detail: I use Products/Services (Items in QBDT) to track donations in QBO. I always include a "Donation Detail" report for my bookkeeping clients that track donors and donations in QBO. Go to Reports --> All Reports --> Review Sales -->Sales By Product/Services Detail.
Need training on how to use QBO or Aplos effectively for a church or better yet ...need an expert in either of those accounting software to do your monthly bookkeeping and/or payroll? See more on our accounting services!