February 14, 2011

Depreciation Entries for Churches

Question:

We have a church building valued at $351,000 which includes land of $120,000. How long should we depreciate the church, and will a parsonage be depreciated for the same period?

Answer:

This question brings up two important points.

1. Assuming that the church is best served by using an accrual basis of accounting in accordance with Generally Accepted Accounting Principles (GAAP), then the church property's value is not the basis for depreciation. Original cost is used. The estimated useful life that many organizations use for real property is 50 years. The same holds true for the parsonage.

2. In my opinion, many small churches are better served using the modified cash basis. Lay people and pastors alike have a better chance of understanding the reports. If external parties demand it, then GAAP may be necessary. Check out the New Downloads on my website, www.MinistryCPA.org. Select the presentation: Church and Christian Ministry Financial Management option. It's a MS--PowerPoint presentation that I've delivered in a few settings that explains my points in greater detail. As I propose the use of the modified cash basis by churches, no depreciation entries are required.

2 comments:

  1. I believe our church used the modified cash basis accounting. There were no fixed assets account in our balance sheet. In our previous congregation meeting there was an inquiry for a list of church properties to be part of the financial report as a footnote. What is the proper way to achieve this concern? We recently conducted an inventory and its a combination of donated fixtures and church purchases. Thank you and God bless!

    ReplyDelete
  2. 1) We see little concern in including this information in the Notes Section of the Financial Report.

    2) We see little value in attempting to reconstruct the original cost of these items.

    3) Finally, this brings up a possible idea of other uses for such a list. You may consider comparing your Notes with your insurance policy to determine whether the church is adequately insured.

    ReplyDelete