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Church members not only look for spiritual leadership from their pastoral staff but also expect their gifts will be used wisely and meet donors’ expectations. To that end, the church accounting staff needs the necessary tools and experience to issue timely reports aimed at satisfying the congregation. So, how does the pastor know if their staff has the right accounting tools?
Evaluating Financial Applications
Fortunately, pastors and church leaders do not have to be an accountant to find out if a product is a good fit for their ministry. They just need to ask the right questions, and the following list should be helpful.
1. Is our bookkeeping software designed for nonprofit organizations?
Most accounting packages are structured to be used by businesses, and businesses are required to keep records to satisfy federal and state income tax laws. On the other hand, churches and religious organizations have very different needs that are no less complex than for-profit businesses. As long as the church does not have unrelated business income, it does not have to file income reports with the IRS. However, it is accountable to the membership, donors, and occasionally to a foundation or other organization that has provided a grant.
These donor groups have expectations that donated funds will be used for the intended purpose. For example, some donations are received for a particular ministry, activity, or building project. Therefore, nonprofit accounting software needs to be able to track and report on each of those activities.
2. Does it comply with FSAB and GAAP requirements related to net asset planning?
FASB (Financial Accounting Standards Board) and GAAP (General Accepted Accounting Principles) provides guidance for acceptable tracking of transactions and related reports. These guidelines are used by public accountants and auditors when advising or auditing records. A common requirement of nonprofit groups is to have a place in the balance sheet within the net asset section devoted to multiple closing accounts. (For-profit software often has one closing account labeled “retained earnings” and uses the term Capital rather than Net Assets.) Reports then use information from the net asset area to show the funds available for distribution.
3. Can it handle clergy compensation and Form W-2 correctly?
A payroll application must be able to handle complex pay packages common for most clergy, as well as accommodating all of the payroll requirements of non-clergy staff. It should also be able to produce required federal and state tax reports including Forms 941, W-2, W-3, as well as the set of reports required under the Affordable Care Act.
4. Is there a method to keep sub-ledgers and general ledgers balanced?
The review of a set of books usually includes a check of accounts payable, accounts receivable, payroll, and contributions against the general ledger. This is generally done by creating a report from, say accounts payable for a given month, and then comparing it to a statement of financial position (balance sheet) for the same period. Allowing changes to AP or GL without involving the other should not be allowed.
5. Does General Ledger restrict changes to finalized entries?
If the software uses a checkbook-style ledger and allows changes to finalized transactions, then it becomes easy, and perhaps tempting, to manipulate the books.
6. Does our software track changes?
Most auditors check to see if there are changes made to original entries. Therefore, it is vital that the software limits that type of activity and tracks any changes that are allowed.
7. Does our software’s standard reports allow omission of transactions?
Some software packages only have drill-down reports with various filters, which can produce reports that may not include all transactions, thus skewing the financial picture.
8. Can it provide general and consolidated reports for committees, congregation, individual ministries, etc.?
Most churches need a set of presentation reports designed for select groups. If the software does not have this option, then the staff is usually forced to create them in Excel, which leads to possible errors, or even intentional misinformation.
Bonus Tips for Getting the Most Out of your Accounting Package
As long as your accounting package provides tools to align with FASB ASU 2016-14 and GAAP guidelines, then you might find the following tips helpful in using your current software.
- Do not readily accept someone’s view that the software cannot perform a needed function. Verify by checking with the supplier’s support and training department.
- Invest in annual refresh training often available in webinars, online videos, remote courses, or onsite consulting.
- Interact with user groups and online discussion communities.
- Verify that controls are in place to enforce segregation of duties.
- Review your chart of accounts at least every three years to keep reporting in step with ministry needs/focus.
- After an audit, make changes in account structure per auditor’s notes. Having a set of books that are easy to audit can cut audit expenses.
Pastors do not have to be an accountant. But, they do need to act wisely in their leadership role, ensuring proper handling of church finances.