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“Budgeting” the Statement of Financial Position (Balance Sheet)

Now, for those bookkeepers and accountants who might be reading this, don’t panic. I know we don’t create a budget for the Statement of Financial Position (Balance Sheet). However, there are items reported on this financial statement that should be accounted for when you are in the midst of your budget cycle each year.

Debt Servicing

When a church owes a mortgage or some other type of loan, the initial liability, or amount borrowed, is reported on the Balance Sheet in the Liability Section. The monthly payment of principal reduces this balance owed as reported on the balance sheet. The monthly interest payment is reported on the profit and loss statement as Interest Expense. So the principal payment is ONLY reported on the balance sheet and is not included in the monthly operating expense statement, the Statement of Financial Activity (Profit & Loss). In other words, if you really want to know how much money the church is spending each month you have to add back in the debt servicing payment that is being made to reduce your loan principal each month.

Some churches show this by adding a line to their monthly reminder (see my previous blog)

Building Fund Balance xx/xx/xx $xxxxxx at xx/xx/xx $xxxxxx

So that the reduction (or payments) reducing the balance are obvious to the congregation.

New Capital Purchases/Expenditures

If your church is planning on buying new sound equipment, or building a new addition to the church, then you need a capital expenditure budget. This is a separate budget from the Operations Budget. These are funds that will be accounted for separately from your day-to-day operations. As funds are collected to make this purchase, you might book them to a restricted equity account for the purpose intended. And when the purchase is made, you would eliminate the restricted equity and record the asset purchased in the asset section of the Statement of Financial Position (Balance Sheet).

Designated/Restricted Funds

When donors give funds and request that they be earmarked for a specific purpose it is the church’s responsibility, if they accept the funds, to attempt to direct them as requested by the donor. (See my Giving Blog.)

We strongly discourage the use of designated funds. It is much preferable to have an operations budget that has been approved and discussions of spending priorities taking place at that time. In that way, funds can all be donated to the general fund with confidence that all of the church priorities will be addressed. Creating designated funds causes financial and managerial headaches. It is my personal belief, that the church’s giving policy should emphatically state that all donations will be attributed to the general funds and expended as approved by the annual budget.

If your church receives designated funds there are several ways of recording and accounting for these funds. I will discuss two.

1. Statement of Financial Activity (Income Statement) Method: In this way, the donations are recorded to a “Designated Funds” income account with a class or category tag that designates the specific purpose designated for the funds by the donor. When expenditures are made for this purpose, then the appropriate expense account is used with the same class/category code. At the end of the year if there is a positive balance in this class/category code then there will be a year-end journal entry made to carry-over this balance. In this way, at least the donations and expenditures flow through the annual budget operating report.
2. Statement of Financial Position (Balance Sheet) Method: Donations are recorded to a Designated Liability Account line item with the description of the earmarked designation, e.g. Summer Camp Designated Funds. Then when expenditures are made for this purpose, the check is coded to this same designated liability account. A positive balance in this account means there are still funds to spend for this given purpose. This method somewhat convolutes the budgeting process as these funds are not flowing through the budget operating statement (Statement of Financial Activity) and are easily forgotten about as the budgeting process takes place.

So is your church considering capital equipment purchases that will be necessary in the next fiscal year when preparing your budget. Do you have a capital budget for these items? Are you considering the funds necessary to spend to service the debt you already have on your Statement of Financial Position (Balance Sheet). Is your church “designated account” poor, i.e. it appears you have money in the bank but most of it is designated (promised) to be spent on specific items?

• Does your church have a giving policy that addresses the necessity to avoid designated funds?
• Does your church have provision for evaluating facility and equipment needs and preparing a capital budget?
• Are you considering your designated funds when you analyze the cash flow of your church?

If you are not using a bookkeeping software application, then you are not properly accounting for your assets and liabilities. GoodBooks wants you to have an accurate and full picture of the financial status of your church. Contact GoodBooks today to begin your subscription to good books!

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