Bookkeeping Foundations: Best PracticesChurch Accounting: Getting Off On the Right Foot

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Bookkeeping Foundations: Presented by Bryan Baughman

©2018 Shelby Systems, Inc.Other brand and product names are trademarks or registered trademarks of the respective holders.

Initial Set Up: Creating a Level Playing Field

Initial Set Up: Creating a Level Playing Field

Financial Policy and Procedure Manual–The most common weakness our firm encounters in church accounting systems is the

absence of well-defined, written accounting and management policies. –Common areas addressed by Financial Policy and Procedure Manual:Organizational structure of the churchBudget developmentCash management strategyInvestment policyFinancial statement presentationConflicts of interestProperty and casualty insuranceBuilding and property useRestricted fundsGift acceptance policy

Initial Set Up: Creating a Level Playing FieldSetting a Chart of Accounts

–The chart of accounts should be set up in such a way that compliments the budgetPrograms of the church are typically set up as

departments within the chart of accounts

–Activity that is outside the budget is typically run through designated accountsDesignated fund balances reside on the balance sheetThe activity (receipts and disbursements) should run

through income and expense accounts– The revenue and expense accounts are set up to close to the

balance sheet account– It is not advisable to record the receipts and disbursements

directly to the balance sheet account

–Use a separate fund for multi-site locationsUse the same department and account structure

Initial Set Up: Creating a Level Playing Field

Segregation of Duties–Segregation of duties is a fancy way of saying that one person can’t, and shouldn’t, do

it all. –Whenever possible, accounting tasks, particularly those involving cash transactions,

should be divided between several individuals to limit the possibility, or even appearance, of the misuse of funds.

–Segregating duties protects our employees and volunteers as much as it does the church.

–3 primary areas of focus:ReceiptsDisbursementsPayroll

Cash Disbursements: Getting out the Checkbook

Cash Disbursements: Getting out the CheckbookOverview

–Stewardship is not just a fancy word, it’s a lifestyle that is modeled by the church.

–How we make financial decisions reflects the DNA of the church.

–How we spend our resources reflects our vision and priorities.

Coding Checks and Other Payments–This is the first step in producing accurate financial statements.

–Like the computer jargon…garbage in, garbage out.

–A complicated chart of accounts makes coding checks more difficult, and therefore, less accurate.

Invoice and Payment Approval–Invoices should be routed through the business office.

–A copy should be sent to the appropriate ministry leader for approval.

Vendor payments–How often should we write checks?A best practice is weekly

–Accounts payable: cash basis verses accrual basis.Backdating checks

–Why it’s important to pay your vendors on time.–Cancel or deface paid invoices to prevent double paying.–The Church should implement a filing system that arranges paid invoices alphabetically

by vendor.–We recommend that the Church adopt a list of approved vendors to further support

the cash disbursement process.

Cash Disbursements: Getting out the Checkbook

Reimbursements – When an Employee becomes a Vendor–If your organization reimburses employees for business expenses, INSIST that it adopt

an accountable reimbursement policy.

Credit Cards for Small (and Large) Purchases–If your organization uses credit cards, INSIST on a written credit card use policy.–Manage spending limits on individual cards.Large purchases should be approved by the business office prior to the purchase.

–Have cardholders submit monthly expense reports that document the business purpose and general ledger account codes.Expense reports should be approved by ministry leaders.

–Alternatives:Prepaid debit cardsReimbursing expenses

–Noncompliance should not be tolerated.

Cash Disbursements: Getting out the Checkbook

Benevolence–INSIST that your organization adopts a clear benevolence policy to guide the provision

of assistance to needy individuals. Benevolence varies from church to church; however, some baseline guidelines should be addressed:Benevolence paid to employees is taxable compensation.As a best practice, its advisable to have a team evaluate candidates rather than a

single person.

Signing Authority - Limits and Considerations–Checks should be signed by an individual who is independent of the disbursement

processes.–The validity (and myths) of dual signatures.

Cash Disbursements: Getting out the Checkbook

Periodically perform an analysis of cash disbursements:–Download your cash disbursement journal to a spreadsheet software program, such as

Excel.–Sort this list by payee and by amount. –Invest half an hour and read the results.

Cash Disbursements: Getting out the Checkbook

Cash Receipts: Passing the Plate

Coding Cash Receipts–Sunday Collections–Mid-Week Collections–Online Collections

Offerings–Individual contributions are entered into the membership database.–Only a summary of the batch or deposit is visible in the general ledger. –The individual who enters the contributions into the database should be independent

from the deposit and other general ledger processes.

Special Events–Maintain detailed records for special events.–Implement policies of accounting for tickets and products sold or fees collected at each

special events.

Cash Receipts: Passing the Plate

Practical Considerations for the Handling and Safekeeping of Cash–Ensure that cash and/or checks collected by volunteers or other employees promptly

finds its way to the business office.–Record program fees in separate revenue accounts rather than netting the receipts

against the expense. –Rotate offering count teams periodically.–Perform credit checks on offering count team volunteers.–Consider using an armored-car service to pick up the Sunday offerings.–Keep the money in a dual-access safe.

Cash Receipts: Passing the Plate

Contribution Policy–When is a gift not really a gift?Too much restriction can jeopardize the deductibility

–Charitable Contribution SubstantiationRequired annually however there could be benefits from more frequency

–Non-Cash ContributionsSubstantiation is different than cash – acknowledgement only with no valueBeware of the Trojan horse

–Designated Funds vs. Donor-Restricted FundsDo not comingle in the same net asset account

–Establish rules for accepting giftsWhat types of restrictions are allowed?

Payroll: The Shepherds Need to Eat Too

Overview–Typically the largest single expense item.–There are some unique rules that are specific to churches and ministers.

Payroll Procedures–A church's accounting and management policy statement should include extensive

personnel procedures covering matters such as salary, vacations, sick pay, promotions and terminations.

–A file should be maintained for each employee.–It is extremely important that all personnel decisions are carefully and accurately

documented.–Perform background checks on all new hires.–Conduct regular evaluations of job performances.–Require written termination letters.–Establish clear segregation of duties in regard to payroll.

Payroll: The Shepherds Need to Eat Too

Exempt verses Non-exempt–Not necessarily the same as salary and hourly.–Ensure there is documentation of hours worked by non-exempt employees on a

weekly basis.Utilize a time clock or other alternative method.

When Employees Serve–Employees should only volunteer in capacities that are distinctly different from their

paid duties.Different role as well as different area of ministry.

Employee vs. Independent Contractor–Determines whether they receive a 1099 or W2.–Determines who pays the social security taxes.

Payroll: The Shepherds Need to Eat Too

Minister Taxation–Who Qualifies as a Minister?–Special Tax Rules for Ministers

Non-Ministerial Employees–Employees of churches who are not ministers are treated essentially the same as

employees of secular businesses.–Non-ministerial employees are subject to FICA.–Churches must match FICA.–Churches are required to file form 941 quarterly and make deposits of taxes withheld

from employee pay. –Churches are generally not subject to state and federal unemployment taxes.–Non-ministerial employees are not entitled to a tax-free housing allowance.

Payroll: The Shepherds Need to Eat Too

Housing Allowances–Establishing the Housing AllowanceGive ministers a worksheet every November

–How the Housing Allowance Exclusion WorksLesser of 1) amount designated 2) actual cost 3) FMV of home fully furnished

–Reporting the Housing AllowanceBox 14 of W2 – not taxable for federal, social security or Medicare

– Subject to self-employment tax

–Church-Provided ParsonageAlso reported in Box 14 of W2

–Can have combination of housing allowance and parsonage allowance

Period Close: How to Finish WellDevelop a Closing Checklist

–What sort of activities should be done daily, weekly, monthly, quarterly, annually?

Bank Reconciliation (Monthly)–Completely reconciling the bank accounts on a monthly basis is essential Single-best accounting control over fraud

–Should be reviewed by someone other than the preparerReview should include an analysis of individual outstanding items in addition to items

that cleared the bank

Form 941 Reconciliation (Quarterly)–Reconcile the amounts reported in the 941 against those reported in the general

ledger

Period Close: How to Finish Well

Journal Entries for Capital Expenditures and Debt Payments (Monthly)–Movement to Balance Sheet (Statement of Position)

–Depreciation can be recorded annually

–Debt payments generally have two components – principal and interest

Basic Set of Financial Statements–Budget to actual (profit and loss)

–Statement of financial position (balance sheet)

–Designated funds summary

Q&A Session and Group Discussion

Bryan Baughman, CPAPSK LLP Representative

bryan@pskcpa.comBryan Baughman is a Partner with PSK LLP in Arlington, Texas. He found

his home at PSK after starting his career with KPMG. Bryan’s area of focus is auditing and consulting with nonprofit organizations, specifically

churches and ministry organizations. Bryan is passionate about his work and takes pride in establishing strong relationships with his clients.