Question:
A church is setting up QuickBooks for its accounting, but its personnel have little experience with fund accounting. What are the entries for the receipt and disbursement of designated gifts and the opening balances?
Answer:
We recommend that most churches that do not need to present financial statements in accordance with Generally Accepted Accounting Principles (GAAP) observe the following steps. Even those churches that do report using GAAP can employ these methods but must make some adjustments when preparing their financial statements.
What we will demonstrate relates to what most churches call "designated gifts" (CPAs call these Temporarily Restricted gifts). These are gifts that donors contribute with the intention that the church will spend the funds as they direct. Most churches do not receive "endowment gifts" in which donors prohibit the expenditure of the core gift (CPAs call these Permanently Restricted gifts). Only earnings on the subsequent investments made with these gifts may be spent and then only for the purpose stipulated by the donor.
We will illustrate assuming a church is using QuickBooks Desktop to record transactions in a designated fund called Missions. Some of these instructions may be slightly modified for churches that use QuickBooks Online.
Opening Balances entered into QuickBooks:
1. In the Chart of Accounts, establish a new account entitled Designated Funds. Categorize it as an Equity account. This account will be a title account to which no transactions are ever recorded. Enter no opening balance.
2. In the Chart of Accounts, establish a new account entitled Missions. Categorize it as an Equity account. In the Sub-Account window select Designated Funds. Enter the Missions fund opening balance. As a new QuickBooks "Company" is established with opening balances carried over from the church's existing accounting system, QuickBooks posts a balancing entry to an account called Opening Balance Equity. In most cases, once all opening balances are entered, a General Journal entry should be made to zero out this balance and reclassify it to a new equity account called General Fund Balance.
Now, the Designated Funds: Missions account should be reflected on the church's Balance Sheet which may be printed from the Reports Menu.
Next, two sample entries (the following entries assume the use of QuickBooks journal option):
1. Receipt of funds designated by a donor to missions:
$x,xxx Debit Cash account (typically, a deposit to the checking account)
$x,xxx Credit Designated Funds: Missions account
When using the "Deposit" feature of QuickBooks, the Deposit is recorded to the Designated Funds: Missions account.
2. Expenditure of funds from gifts previously designated by donors to missions:
$x,xxx Debit Designated Funds: Missions account
$x,xxx Credit Cash account (typically, a check written against the checking account)
When using the "Write Checks" feature of QuickBooks Desktop, the Check amount is recorded to the Designated Funds: Missions account
We believe that these entries represent the simplest approach to maintaining designated fund balance accounts. On any single date the Designated Fund: Missions account can be accessed for a real time balance of unexpended funds.
There are more complex approaches to managing Designated Funds. Those methods which may use either (1) separate Equity accounts for current year designated receipts and designated expenditures, or (2) the use of what QuickBooks calls “classes.” Both methods, however, require a more advanced understanding of year-end closing entries.
Thanks for your thoughts, Corey.
ReplyDeleteI know this is an old post, but it's very helpful. One question though... Do you know any way of generating a report that shows the monthly starting balance, change for the month, and ending balance for each of those equity accounts?
ReplyDeleteTo generate a report in QuickBooks that shows the monthly starting balance, change for the month, and ending balance for each equity account: 1) select the "Reports" pulldown menu, 2) under "Accountant & Taxes" choose "Trial Balance", 3) modify the date range to reflect the desired period, and 4) double-click on the amount for the equity account of interest. This will generate a "Transactions by Account" report.
ReplyDeleteThis is article is very helpful. In quickbooks online, you also have to specify the type of the equity account before the balance setup screen.
ReplyDeleteOptions are:
Accumulated Adjustment
Common Stock
Openning Balance Equity
Owner's Equity
Paid-In Capital or Surplus
Partner's Equity
Preferred Stock
Retained Earnings
Treasury Stock
You cannot bypass this detail but they choices are specific and seem off base for a designated fund. I used Accumulated Adj based on description but it seems odd...
Thank you for your input on what to select.
I have a question regarding your post - why would the contributions not flow not be credited to an income account for restricted contributions? At year end these would flow to the designated funds, correct?
ReplyDeleteThe income accounts in QuickBooks relate to unrestricted income and expenses, so a credit to an income account would not flow to the correct fund balance. Furthermore, end-of-year net income will not close to the appropriate restricted fund accounts if the restricted gift is entered as a revenue.
ReplyDeleteSo how do you really know what your contributions are for the year if you post the Credit and Debit in the same equity account and never make an entry to the Revenue account? What if 50% of your contributions are specified and you have $500,000 in Contributions recorded for 2014 and $500,000 of expenses. You really had $1 million of each and you now have miss reported to your congregation - $500,000 of expenses - Could be grounds for a suit wouldn't it - Gross negligence? Or do you then go back and manually repost these to your reports to correct the funds accounting hybrid to double entry.
ReplyDeleteIf using QuickBooks, you can set up multiple Income Statements where each transaction can be designated to a specific "class." Each "class" ultimately gets closed to Retained Earnings.
ReplyDeleteFurther, you would need to have a class for each designated account (e.g. Missions Fund, Benevolence Fund, Organ Fund, etc.). We suggest closing the classes into the Missions Fund, Organ Fund, Benevolence Fund, etc.
At the end of the year, you can produce a report that involves an analysis that shows the equity method you are using.
Keep these two things in mind as well:
1) The General Fund gifts and expenditures relate to the general fund budget which is typically approved/modified by the whole church. Designated funds are donor directed and comingling them would distort the general fund budget.
2) We do recommend that reports of the Designated Funds receipts and expenses be provided to the church as separate reports.
Thank you for this Q&A.
ReplyDeleteRelating to the original answer - what is the best procedure when there are also expense accounts with budgets for a given ministry that has a designated fund? For example, and using the posted Missions account example, suppose there exists a Missions expense account with a budget and also a Missions designated fund. Donations are credited to the Missions account and debited to the checking. Is it best to apply Missions expenses against the designated fund first, then, if need be, split the expense between the designated account and the expense account should the designated account run to zero?
Also, suppose book sale income is generated by those in the Missions ministry. The ideal case would be for there to be a balance of book purchases to books sold. That may not always be the case though. Since, at least in my brain, expense accounts should never be credited except for a return or perhaps in the case of an adjustment for an error, would it be correct for the deposit of book sale money be made to the Missions designated fund? Or, is there a better and more correct method to handle this?
Thank you for your responses..
The board of our church has budgeted a set amount each month to save for future church planting. Some of the monies will be used this fiscal year, and some will be saved for longer term. My understanding is to set-up a designated fund equity account. Since this is not an expense, it doesn't show up in the actual budget; it looks like we are under budget. An accountant said I should show it as a deferred liability, but he has not done church accounting. Is there a way to set this up properly to have it show up in the budget?
ReplyDeleteThank you, Anonymous, for your question.
ReplyDeleteWhether you post the transaction against designated or general fund should be consistent with the general budgeted account. Meaning, was the budget account established to pay for a specific portion of mission expenditures, or was the account established only to cover shortfalls in the designated fund account?
When monies are spent that fulfill donor’s designations, disbursements should first be posted against those designated gifts. If you have an expenditure that satisfies donor intent, you should satisfy that donor designation with your earliest expenditures.
Thank you, Laura D., for your question too.
ReplyDeleteWe are interpreting this comment to mean the board has authorized a general fund expense for the transfer of funds from the general fund to a designated account.
There should be both a church planting expense account (budgeted) and a church planting designated fund account (equity). Let’s use an example for how this would work. Let’s say the church budgeted $6,000 ($500/month) to church planting for the fiscal year. Of the $500 each month, $250 is for long-term purposes. Each month the church would enter a journal entry.
Debit: Church Planting Expense Account (budgeted) $250
Credit: Church Planting Designated Fund (Equity) $250
What about the other $250? When the church needs to use budgeted monies, it would cut a check and select the Church Planting Expense Account just like any other budgeted expense.
By the end of the fiscal year, the church should show $3000 in its Church Planting Designated Fund (Equity) account. But the budget account will show $6,000, with $3,000 “spent” to the equity account and $3,000 for current-year expenditures.