I ended my previous post with this statement:
“Pastor, there’s no need to wait till you can hire a trained bookkeeper or accountant to take steps to make the bookkeeping in your church stronger.”
Listen, a lot of my posts are based upon the principle found in 2 Corinthians 8 – do what is right before God and man. As it relates to the accounting in the church, this means following the standards as set forth by the FASB. In a nutshell, to adhere as best you can to US GAAP.
A primary benefit of these standards and principles is that they produce a complete picture of the financial condition of the church. This leads to better decisions.
To that end, for churches on the pure cash basis as described here, I’m launching a series of blog posts to show how to ‘kick up your church’s bookkeeping one notch at a time’ – so that it’s not overwhelming. Like eating the elephant one bite at a time. Once you get one notch or bite mastered, go to the next one.
Start entering invoices upon receipt.
Set up your accounting system to enable you to input invoices for payment later – the due date. The date to “key off of” is the invoice date in terms of what month the invoice belongs in. Research how to set up your system to do this. (Quickbooks allows this for example, in case you’re wondering).
This is the first step in getting your expenses in the correct period as it’s based upon the date the expense was incurred, instead of paid. This first step, for now, is related just to invoices.
After invoices are entered, then cut checks as things come due.
3 Preliminary Things:
1. Set up Liability Accounts in your Chart of Accounts
Under pure cash accounting, when the check was written, your system debited expense and credited cash. Under this system, the initial entry is to debit an expense account and to credit an accounts payable account (liability).
Then, when the check is written, the system will debit the accounts payable account (thus clearing the liability) and will credit a cash account.
You’ll need to decide now or perhaps later whether you want an accounts payable account for Unrestricted Expenses and one for Restricted Expenses.
One way to look at this is – your church incurred the liability or ownership of the item or service on the invoice date.
2. Set up Accounting Period-end Dates.
Chances are you’ve been using a calendar month end date. That’s fine. I mean it works.
I use and recommend a more precise approach. It’s known as a 5/4/4 or 4/4/5 system – for the # of weeks within each period or month within a given quarter. With a calendar month end, months are either 28, 30 or 31 days in length – while “Income Sundays” are always spread over 28 or 35 days. In other words, there’s either 4 or 5 Sundays in a given month while expenses are always 4 weeks or 4 weeks and 2 or 3 days. They don’t match up.
Under the 5/4/4 method, for example, January would be 5 weeks, February and March would be 4. April has 5 and so on. Expenses run the same 5/4/4. This method adheres to the Matching Principle of Accounting.
3. Establish Cut-off Dates the Week After Period End
This allows time to receive invoices related to the prior period to be received and entered in the correct period. The key is the invoice date.
For example, invoices received by end of day Tuesday are entered Wednesday. (Entered in the prior period). Checks are “cut” on Thursdays for items due the next week (entered in the current period). The key being the check date.
This 1st notch just gets invoices in the period they’re related to. Expenses are recognized sooner as are the associated liabilities. We are starting to paint a bigger, more inclusive picture for better decision making.
In my next post, we’ll discuss capturing expenses incurred but weren’t received by the month-end cutoff.