The short answer
A cash-basis church records gifts when they arrive and bills when it pays them. Accrual books also record what the church owes and what it has been promised, following FASB rules for nonprofits (GAAP). Modified cash sits in between. No federal rule picks a basis for a church's own books, so the choice usually turns on who reads the reports and whether a lender or denomination wants statements a CPA reviews or audits.
What each basis records
The finance committee meets in early January. The bank balance looks healthy, but three December bills are still in the office tray, and the building campaign has pledge cards for twice what has come in. Whether any of that shows up in the December report depends on the basis the books are kept on.
The basis is the rule for when income and expenses are recorded. It does not change what the church owns or owes. It changes what the reports show about it.
- Cash basis. Income is recorded when money is received and expenses when they are paid. Unpaid bills and unpaid pledges do not appear in the books at all. The bank reconciliation and the income statement tell nearly the same story.
- Modified cash basis. Cash is the starting point, with a few accrual-style items added on purpose, often payroll taxes withheld but not yet paid, or a building loan and the property it bought. There is no single official definition, so the church's own list of what is modified is the definition.
- Accrual basis (GAAP). Income is recorded when it is earned or promised and expenses when they are incurred. The books carry receivables, such as unconditional pledges, and payables, such as bills received but not paid. Statements prepared under GAAP follow the FASB's rules for not-for-profit entities.
Who decides, and what the IRS says
IRS Publication 1828, the tax guide for churches, says churches must keep books and records that support their tax-exempt status and any returns they file, and that there is no specific format for keeping records. It lists the kinds of records required, such as ledgers, payroll records, banking records and minutes, but it does not choose an accounting basis for a church's own reports.
Most churches also file no annual information return, which is covered in what a church does and doesn't file. So the basis is usually a governance choice. The board or finance committee sets it, often in a written financial policy, with input from the church's CPA, and then sticks to it so one year compares with the next.
The accounting profession groups cash and modified cash with other non-GAAP options it calls special purpose frameworks. The AICPA describes these as widely used alternatives to GAAP. Using one is a recognized choice, not a shortcut.
Where the difference shows up in a church
For many small churches the three bases produce almost the same numbers, because most giving arrives as cash and most bills are paid within the month. The gap opens in a few predictable places.
- Pledges and campaigns. Under GAAP, the FASB's contribution rules in ASU 2018-08 generally record a contribution, including an unconditional promise to give, when it is received. A conditional promise, one with a barrier the church must overcome and a right for the donor to take it back or be released, waits until the barrier is met. Whether a church's pledge cards are unconditional promises is a judgment for the CPA. On the cash basis, pledges are tracked outside the books and only gifts actually received are income.
- Unpaid bills at month end. Accrual books show December's utility bill as a December expense even if it is paid in January. Cash books show it in January, which can make December look better than it was.
- Payroll taxes withheld. Money withheld from paychecks and not yet deposited belongs to the government. Many cash-basis churches record it as a liability anyway, which is the most common modification.
- Restricted funds. Fund balances can be tracked on any basis. What changes is whether an unpaid pledge to a restricted fund appears in that fund's balance. See fund accounting.
- Noncash gifts. GAAP statements record many donated items. Cash books usually do not. The records the church keeps either way are in noncash gifts to a church.
| If this is true | Cash basis | Modified cash | Accrual (GAAP) |
|---|---|---|---|
| Volunteers read the reports and activity is simple | Often the plainest fit | Works if the added items are few | More detail than readers may use |
| A pledge campaign is under way | Pledges tracked outside the books | Pledges usually still outside the books | Unconditional pledges recorded as received |
| Bills are often unpaid at month end | Expenses land in the month paid | Can add payables if the policy says so | Expenses land in the month incurred |
| Payroll taxes are withheld but not yet deposited | Liability not recorded | Commonly added as a liability | Recorded as a liability |
| A lender or denomination asks for GAAP statements | Year-end adjustments needed | Year-end adjustments needed | Matches the request |
Audits, reviews and lenders
A CPA's audit or review reports on financial statements prepared under a stated framework. That framework can be GAAP or a special purpose framework such as the cash or modified cash basis, and the report says which. The church, its board and the CPA settle that before the engagement letter is signed.
The requirement usually comes from outside. A loan agreement, a denomination's rules or a grant may name the level of CPA work and sometimes the framework. Read the document that creates the requirement. If it says GAAP, cash-basis books will need adjusting entries at year end, which the CPA proposes and leadership approves, or the books move to accrual during the year. Getting ready for that work is covered in preparing church books for an audit or review.
A bookkeeper keeps the books on the basis the church chose and records any adjustments that are approved. Choosing the reporting framework, and the CPA's opinion on it, are outside bookkeeping. Danielson Bookkeeping's church bookkeeping covers fund accounting and monthly reports on the basis the church sets; audits, reviews and tax work stay with the CPA.
What changes in the monthly report
Board members read the same handful of pages whatever the basis: a summary, budget versus actual, fund balances, a balance sheet and a cash outlook, as described in what a monthly report for church leadership should include.
On the cash basis, budget versus actual compares the budget with money that actually moved, and the bank balance is close to the bottom line. On the accrual basis, the report adds bills owed and pledges outstanding, so leaders see commitments that cash does not show yet. A modified cash report should say plainly which items it adds.
Whichever basis you use, label it on every report and keep it the same from month to month. A short list of the reports to expect each month is in what your bookkeeper should send monthly.
Choosing a basis and writing it down
Cash basis is often the plainer answer for a small church with simple activity and volunteer readers. Accrual earns its extra work when a church has a pledge campaign, regular unpaid bills, debt covenants or a GAAP requirement. Questions to settle with your CPA:
- Who reads our reports, and what do they need to see?
- Does any loan, denomination rule, grant or bylaw name a framework or a level of CPA work?
- How large are pledges and unpaid bills at a typical month end?
- If we use modified cash, which items are we adding, and is that list in writing?
- Who records year-end adjustments, and who approves them?
