Your church’s number one priority is likely furthering its mission, and for good reason. Between creating space for worship, fostering discipleship, serving the community, and keeping your congregation engaged, there are many efforts that keep you busy each day and allow you to make a positive impact.
As you go about all of this great work, sometimes financial management ends up taking a backseat. However, effective stewardship of your church’s finances is essential to the success of your mission-related activities, and a solid accounting system makes this possible.
To help you start strengthening your church’s financial management practices, this guide will cover the basics of church accounting, including:
- The Difference Between Church Bookkeeping and Accounting
- Creating an Operating Budget for Your Church
- Financial Reporting Requirements for Churches
Keep in mind that the primary purpose of church accounting is accountability. The practices in this guide will not only allow you to manage day-to-day operations more effectively, but also increase transparency with donors about how your church is using their contributions. This helps build trust among your congregation, which makes them more likely to continue supporting you long-term. Let’s dive in!
The Difference Between Church Bookkeeping and Accounting
While church bookkeeping and accounting are both essential for effective financial management, the two functions are often confused. Let’s examine the difference between the two.
Bookkeepers take care of your church’s day-to-day financial needs. Their duties include:
- Basic financial data entry (such as recording weekly donation amounts)
- Writing checks and paying bills
- Depositing funds into your church’s bank accounts
- Processing payroll
While it can be helpful for bookkeepers to have specialized education and training, it isn’t required. Depending on your church’s needs and budget, your bookkeeper can work full-time, part-time, or even on a volunteer basis.
Unlike a bookkeeper, your church’s accountant is required to have at least a four-year degree in accounting or a related field, as well as a Certified Public Accountant (CPA) certification. This is because accountants are responsible for more complex analytical tasks, such as:
- Setting up and reviewing your chart of accounts
- Compiling financial statements
- Reconciling bank accounts
- Preparing W-2 and 1099 forms for your staff for income tax purposes
Whether you outsource these services to an accounting firm or hire someone in-house, make sure your accountant has experience working with churches. Church accounting is a unique beast to tackle, and an accountant who understands its nuances will be able to effectively analyze your church’s financial situation and create specific goals that help you grow.
Creating an Operating Budget for Your Church
Your church’s annual operating budget is one of the most important financial tools you have at your disposal. This planning document outlines your predicted revenue and expenses for the year, which we’ll discuss in more detail below:
Most churches categorize their revenue by source when creating their budgets. While individual donations likely make up the bulk of your church’s funding, it’s helpful to include additional subcategories like event revenue, merchandise sales, and mobile donations to get a fuller picture of how your congregation gives.
If you find that your church is reliant on just one or two major funding sources, consider diversifying your revenue streams by exploring additional church fundraising ideas. This can increase your church’s financial stability so you have enough revenue to fund all of your activities if unexpected costs or circumstances arise.
On the expense side of your church’s budget, you’ll organize your predictions into the following three categories:
- Program costs are directly related to furthering church ministries, such as expenses associated with hosting youth group events or providing educational materials for Sunday school classes.
- Administrative costs are necessary to keep your organization running day to day, such as utility bills, staff salaries, and purchases of office equipment.
- Fundraising costs are incurred while planning and running fundraising initiatives for your church. For example, printing and mailing fundraising letters or paying a web designer to add a donation page to your church’s website would fall into this category.
Although your church is considered a nonprofit organization, that doesn’t mean your budget has to break even every year. In fact, it’s best if you can budget for a revenue surplus! You just need to reinvest all of your funding into your church, meaning any revenue that doesn’t go directly toward covering expenses should be placed in a reserve fund like a savings account.
Financial Reporting Requirements for Churches
Regularly reporting your church’s finances is important to ensure transparency with your congregation and comply with state and federal regulations. There are several types of reports you could use, but two of the most important are financial statements and donation acknowledgments.
Compiling financial statements at the end of each fiscal year allows your church to gain insight into its use of funds and find areas for future improvement. According to Jitasa’s financial management guide, the main types of financial statements that churches and other tax-exempt organizations utilize include the:
- Statement of activities. The nonprofit parallel to the for-profit income statement, this document outlines your church’s actual revenue and expenses for a given fiscal year, which allows you to make more accurate projections in the coming year’s budget.
- Statement of financial position. Also known as a balance sheet, this statement breaks down your church’s assets and liabilities to provide a snapshot of its financial health and help you plan for growth.
- Statement of cash flows. This statement helps your church evaluate its spending habits by showing how cash moves in and out through operating, investing, and financing activities.
Most nonprofits also compile a statement of functional expenses—which provides an in-depth view of the organization’s program, administrative, and fundraising costs—as a part of the IRS Form 990. Since churches usually aren’t required to file that form, whether you have to compile a statement of functional expenses depends on state regulations. However, the statement can also help with the budgeting process, so you might choose to create one even if it isn’t required.
When members of your congregation give to your church, make sure to send them a donation acknowledgment letter. While one major purpose of this letter is to thank the donor for their contribution, it should also function as a donation receipt. This way, if the donor wants to write their gift off as a charitable contribution when filing their personal tax return, they’ll have the documentation they need to do so.
To make sending donation acknowledgments easier, there are free templates available online like these church donation letter downloads by Fundraising Letters. Make sure to personalize each letter with the donor’s name and contribution amount—not only is this necessary for them to receive the tax deduction, but it also shows each donor that your church values their individual gifts, making your gratitude more genuine.
Effectively managing your church’s finances through sound accounting practices is critical for your church to grow. By maintaining a high level of accountability and transparency, you can both attract new members and build trust with your existing congregation. As you create your operating budget and report on your finances, be sure to work with an accountant who has experience with churches to help you accomplish your financial goals.