Open the chart of accounts in many church files and you will find three kinds of thing mixed together: types of spending, ministries and funds. "Youth", "Youth camp scholarships", "Youth travel" and "Travel" all sit in one long list, and nobody is sure where a van rental belongs. The fix is not a longer list. It is deciding what the chart of accounts is for, and moving everything else somewhere better.
The five sections
Every chart of accounts, church or business, has the same five sections.
- Assets. What the church owns or holds: bank accounts, undeposited offerings, investments, prepaid insurance, buildings and equipment.
- Liabilities. What it owes: unpaid bills, card balances, payroll taxes withheld and not yet paid, a mortgage.
- Net assets. Assets minus liabilities. A business calls this section equity. In a church it is where fund balances live.
- Income. Tithes and offerings, restricted gifts, facility use, event fees, interest.
- Expenses. Staff, facilities, ministry programs, missions, administration.
Net assets: with and without donor restrictions
Older church files and older templates divide net assets into unrestricted, temporarily restricted and permanently restricted. That wording is out of date. FASB Accounting Standards Update 2016-14 replaced the three classes with two for not-for-profit financial statements:
- Net assets without donor restrictions. General funds, plus anything the board has set aside by its own decision. The standard calls those board-designated net assets, and they stay in this class because the board can reverse its own designation.
- Net assets with donor restrictions. Gifts the donor gave for a stated purpose or period, including gifts meant to be held permanently.
Not every small church issues statements under these standards, and whether yours must is a question for your CPA. The two-class wording is still worth adopting, because it answers the question leadership actually has: who is allowed to change how this money is used? Restricted, designated and general funds covers that distinction in full.
Funds are not accounts
An account answers what was this? A fund answers whose money paid for it? A van rental for the youth mission trip is a travel expense (the account) paid from the missions fund (the fund). When funds are built into the account list, every expense type has to be repeated for every fund, and the chart grows by multiplication.
Keep two lists instead. The chart of accounts holds types of income and expense. A separate fund list holds the general fund and each restricted or designated fund, and every transaction is tagged with one of each. In QuickBooks Online that second list is usually built with classes; the steps are in setting up QuickBooks for church fund accounting. Ministry areas such as youth, children and worship work the same way: they are a tag on the transaction, not a branch of the chart.
Keeping it short
An account earns its place if seeing it separately would change a decision. A hypothetical church might keep one "Utilities" account rather than separate lines for gas, electricity, water and trash, because the board approves one facilities number. The same church might keep "Pastoral housing allowance" apart from "Pastoral salary", because the two are approved and reported separately.
- Match the budget. If the budget is approved in twelve lines, the chart should roll up to those twelve lines without a spreadsheet in between.
- Group under parents. Personnel, Facilities, Ministry, Missions and Administration, each with a few sub-accounts, read better than forty accounts side by side.
- No vendor accounts. The vendor record already shows what was paid to the power company.
- No "Miscellaneous" as a habit. One small catch-all is fine. When it grows, something in it needs a real home.
The general principles, and the software tools that carry detail without adding accounts, are in building a chart of accounts you'll actually read.
Numbering
Account numbers are optional, and no authority prescribes a scheme. A common convention gives each section its own range, for example 1000s for assets, 2000s for liabilities, 3000s for net assets, 4000s for income and 5000s and above for expenses. Two habits make any scheme last: leave gaps between numbers so an account can be added without renumbering its neighbors, and keep related accounts in the same block so a report reads in a sensible order.
Accounts churches tend to miss
- A clearing account for online giving, so gross gifts and processing fees can be recorded separately. See recording online giving.
- Payroll liabilities, so amounts withheld from staff show as owed until they are paid over.
- Money held for others, such as amounts collected on behalf of a denomination or another ministry, which are not the church's income.
- Separate income accounts for restricted gifts, where leadership wants general giving and restricted giving reported on different lines.
Changing a chart that already exists
Change it at the start of a fiscal year where you can, so one year's reports stay comparable. Merge duplicate accounts instead of deleting them, so the history moves with them. Write one line beside each account saying what belongs there, since that note is what keeps the chart tidy after the next change of treasurer.
If the fund balances in your current file do not add up to the cash in the bank, the chart is only part of the problem. Fund accounting for churches describes what a working setup reports each month.
