Additionally, donors are occasionally solicited to contribute to short-term special projects with the promise that their donations will be spent only for that temporary project. For example, perhaps the women's ministry wishes to received designated contributions toward a one-time equipment purchase.
How might an organization accomplish these multiple objectives: 1) tracking men's and women's ministry general fund balances year-on-year, and 2) tracking special projects' receipts and disbursements?
Before addressing the question, we should acknowledge that the simplest approach to handling Designated Fund Gifts and similar activity involves posting all General Fund transactions to Income and Expense accounts, while all Designated Fund transactions are posted to Equity accounts.
The alternative approach, which we will discuss, requires a higher-level of knowledge and consistency when posting transactions. The hypothetical scenario we have offered effectively illustrates two separate but related accounting system practices.
1. The Use of Classes
We caution users of a class system to beware of overusing classes, as typically no more than two or three classes are needed (e.g., Men's Ministries, Women's Ministries, and perhaps one or two more). In this example, the not-for-profit should create two classes in QuickBooks (also referred to as divisions or departments in other software): men's ministry and women's ministry.
Every receipt of income must be posted to a class, or if appropriate, split between classes ("split entry" in QuickBooks). The same process should be followed for expenses. This will result in an individual Profit and Loss report for each class and one for the entire ministry.
At the close of the year, most accounting software will zero-out all Income and Expense accounts and place the net income or loss amount to a single account in the Fund Balance/Equity section of the Balance Sheet. To remember any excess or deficiency of receipts for each class in the following year, an adjusting journal entry must be prepared and posted to two separate Equity accounts maintained for each respective class.
2. Special Projects
For special projects that are not part of the general operations budget, we recommend the use of Fund Balance/Equity accounts to record designated donor receipts and the careful expenditure of those gifts. This allows for designated funds to remain separate from the General Fund operation of the ministry. For example, if the women's ministry wishes to receive designated contributions toward a one-time equipment purchase, it might create a separate Designated Fund Equity account specifically for related contributions and disbursements.