Accounting and Money for Ministerial Leadership. Nimi Wariboko
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even if the person making the pledge has an impeccable pledge redemption record. This is what cash accounting means. On the other hand, accrual accounting records revenues when earned and not when received and recognizes expenses when incurred instead of when they are actually paid off. For a church on the cash method, water bill for December 2011 will not be included in the expenses of that year if the actual payment was made in January 2012. Many churches use a modified or hybrid system that combines the features of cash and accrual accounting methods.
The principle of consistency requires that once a church has chosen a method it should stick to that method for the sake of comparability of reports across time. It is not a measure of good practice to change from cash to accrual in one year and in the next go back to cash accounting.
The record of revenues and expenses under each of this method of recognition has to also pass the test of matching. This is to say accountants try to match expenses of producing a service or product with the revenue associated with the service or product. Part of the activities of the accounting departments in any organization is to ensure that expenses are measured, recorded, and reported in such a way that identify them with their associated revenues.
Though expenses and revenues are to be matched, accountants bring different attitudes to them. The rule (the principle of conservatism) is that the accountant should be quick to recognize expenses and losses, but slow to recognize revenues and gains. The reason being that he or she should work to avoid the overstatement of values of assets and owners’ equity.
The conservative attitude does not mean that accountants record all insignificant events or every outlier for the sake of completeness. They make judgment about what to observe and measure with the aid of the principle or concept of materiality. They observe, measure, record, and report important things. The only problem is that it is difficult to draw a bright line between important things and insignificant transactions and events.
Before accounting statements are prepared and reported a decision also has to be made with regard to the accounting period a church wants to use for its reporting purposes. The period is usually a year and the church’s financial statements must include a description of it. The description enables the reader to know for what period income or cash flows has been measured. Statements are usually twelve months apart, but a church can also choose to present quarterly statements.
Values in financial statements are at historical cost, less depreciations or repayments. Traditionally in the United States accountants will not measure, record, and report assets in the balance sheet at current market value. So when current revenues are matched with expenses, the expenses are recorded only at their historical values. In times of high rate of inflation and rapid changes in the purchasing power of a national currency, this simplification (cost concept) does not augur well for sound economic decision-making.
In another vein the reports of the church treat the church as a going concern and as such the usual financial statements will not present the liquidation value of the church. The preparers of financial statements will assume that the church will operate indefinitely as a going concern. It does not matter that some in the church think that the church is better dead, liquidated than for it to continue to be operated as a going concern.
The measurement, recording, reporting of expenses and revenues, and of all other categories in the balance sheet, income statement, and statement of cash flows are presented only in terms of money. So whatever is difficult or impossible to observe and measure in common monetary units does not get reported. For this reason, among many others, it is important for the pastor to know that financial statements do not present a complete picture of the church. It will not cover knowledge, skills, reputation, and faithfulness of the members that have not yielded revenues but can ensure the continued survival and flourishing of the church. As with the methodology of National Product (GNP), products and services “outside” the market system are not counted, measured, and reported in the measurement of national income. In both cases, unpaid volunteer work is not counted.
Financial Statements
1. Balance Sheet (Statement of Assets and Liabilities)
2. Net Assets
3. Statement of Revenue and Expenses (Income Statement)
4. Statement of Cash Flows
5. Fund Accounting
6. Auditor’s or Accountant’s Report
7. Footnotes
Balance Sheet (Statement of Assets and Liabilities)
The balance sheet shows you the current economic status of the church at a given date. This snapshot of the financial information of the church captures the assets, liabilities, and owners’ equity (net assets). The balance sheet presents the assets and liabilities of the church at a given date. The values of assets and liabilities as recorded in the balance sheet are not the original costs; they are the original cost of assets less of depreciation (portion of the original cost included in expenses of preceding periods) or cost of liabilities less payments and extinguishments. Land is almost always reported on the balance sheet at its original cost. As you move down the balance sheet the quality of line numbers drops. This is true for assets and liabilities. Doubt about their true value increases.
Assets are resources of the church that can earn income or can yield future economic benefits. This includes buildings, vehicles, equipment, furniture, cash, prepayments, investments in bonds, securities, and stocks, claims, and so on. Assets are things or securities that the church owns which can be exchanged for cash or economic benefits in the future. Assets could be monetary or non-monetary, current or fixed, tangible and intangible assets.
Liabilities are obligations of the church, which will demand future payments or sacrifice of economic benefits. They include debts, mortgage, wages, unpaid bills, loans, and so on. Generally, those who have provided resources (cash or non-cash) to the church to whom the church has an obligation to make payments are called creditors or lenders. Liabilities could be short term (current) or long-term.
Net Assets (Equity)
Net Assets is the difference between assets and liabilities. Net Assets = Assets – Liabilities. This statement shows the change in the net assets of the church. It is determined by the “capital contributions” to the church (that is, donations in form of restricted and unrestricted funds) and accumulated net earnings (that is, total revenues less total expenses, accumulated surpluses and deficits).
The “earning” figure is either added or subtracted from the “unrestricted funds” in the balance sheet in a given year, depending on whether it is positive or negative. The sum of restricted and unrestricted equity or capital (as represented by net property and equipment) is the “Net Assets.” In very simple terms, the net asset is the differences between the assets of the church and its liabilities (see a sample balance sheet, on page 21). It represents the net worth of the church. In the corporate world, the net assets will be referred to as “Shareholders’ funds.”
Statement of Revenue and Expenses (Income Statement)
Tithes and offerings of a church are considered as its revenues. This is not all. Churches also earn interest income and dividends from their investments. They also receive donations and contributions. Some churches that have rental properties earn revenues from them. Expenses of a church include wages and salaries, utility bills, bank charges, interest expenses, insurance payments, offices supplies, and so on that help it to operate. Revenues less expenses represent the “net income” in corporate accounting language. Revenue – Expenses = Net Income (or Net Loss).
Statement of Cash Flows
This statement indicates cash generated by the operating, investing, and financial activities of the church. It records the sources of cash and the their destinations during a given period. It gives you a measure of the liquidity of the church.
We stated earlier that accounting works with an equation, Assets = Equities (owners’ equity + liabilities). The balance sheet (statement of financial position) is where this is amply