Churches Recording Depreciation

Question:

Should our church record depreciation on its fixed asset purchases? We have been advised to do so in order to remain compliant with Generally Accepted Accounting Principles (GAAP). We see the benefit of having a record of our fixed assets and their values (original values or replacement cost), but don't see much value at all in recording depreciation.

Answer:

In order to provide users of financial statements a GAAP presentation, building, equipment, and other long-lived asset purchases must not be recorded as expenditures in the year of purchase. Rather, their costs are allocated to expenses over the years of their useful lives. Accountants call this allocation process depreciation. 

Some churches are required to present GAAP reports for purposes of bank financing or donor expectations. The two primary GAAP reports are titled "Statement of Activities" and "Statement of Financial Position." Generally, this is limited to larger ministries. 

We have found that most members of a congregation better understand reports presented on a cash or modified cash basis. For financial statements reported on a cash basis, church members should be able to clearly see that the beginning of year cash balance, plus total receipts, less total disbursements, equals end of year cash. This means that all receipts, even loan proceeds, show up as receipts on a Statement of Receipts and Disbursements (note, not an Income/Profit or Loss Statement). All disbursements, including purchase of long-lived assets and principal payments on debt, are reported on this statement as well. Accordingly, no depreciation is recorded.

Statements that use a modified cash basis generally include assets and debts that are current in nature. For example, expenses are reported on the Statement of Receipts and Disbursements even though they are paid a few days after the reporting period is over (e.g., the December utility bill that gets paid in January, after the budget year is over shows up as a December disbursement). 

One caveat. We believe that all ministries should employ the use of a balance sheet beyond simple reporting of a cash balance. The reason? Designated gifts. A cash-basis church that never receives designated gifts will present a balance sheet with cash, no liabilities, and an amount equal to the cash balance in its Equity section (more appropriately called the Fund Balance section).

But most churches do receive designated gifts and do not spend 100 percent of these gifts before their budget years are over. These unspent amounts will be forgotten without one key modification to the balance sheet. Since we now a lot of churches use QuickBooks, we'll explain our common suggestion using QuickBooks Desktop features.

When a designated gift is received, the "Record Deposit window" must include a Split entry. General offerings should be posted to an Income account type. But the designated portion of the total deposit should be posted to an Equity account type. QuickBooks will "remember" this contribution and not close it out to zero at the end of the year.

When a check is written ("Write Checks window") to spend monies received from donors who put these stipulations on their gifts, then the check must be posted to the Equity account type that was established when the gift was deposited.

One additional benefit of this technique for designated gifts received and disbursed: the church's General Fund budget receipts and disbursements are not inflated by this non-budget activity.

Updated June 2020