3 min read
Churches and businesses have different financial goals. Profitability is a business’ bottom line. On the other hand, a church’s main goal is to accomplish its mission. Of course, both need resources to reach their goals, but how they use and account for these resources is different.
To better understand the importance of church accounting, we need to understand the contrast between for-profit businesses and not-for-profit institutions.
For-profit vs. not-for-profit
As one might expect, a for-profit business is “established, maintained, or conducted for the purpose of making a profit.” Business stakeholders are often most concerned with the bottom line.
At the same time, the leadership of churches and nonprofits is focused on tracking contributions and allocating funds based on the mission.
They don’t operate to make a profit, thus the title: nonprofit. Churches fall under this category. Here are the key differences:
One distinction between businesses and churches is that individuals can be owners or shareholders of a for-profit business. In business, these owners benefit from their company’s earnings as they receive a portion of the revenue or an increase in value.
Churches, on the other hand, are not owned. No individual possesses a percentage of the organization. Under the Financial Accounting Standards Board (FASB), specific accounting principles are in place for non-profits. Each church is under the financial laws of the state in which it resides—being run by pastors, its leadership team, and staff.
Because there are no owners, the church’s accounting system doesn’t include owner’s equity or retained earnings accounts.
2. Fund Accounting
Fund accounting is another significant difference. While businesses and nonprofits have a general ledger, nonprofits have an accounting method that manages various types of funds.
For churches, this emphasizes accountability of where money is going versus profitability. It groups assets and liabilities according to purpose, which makes donations, or revenue, restricted in their use.
For example, if a church runs a campaign to raise funds for a mission trip, the money received for that campaign can only be used for that purpose. The church cannot use that money for other purposes without getting permission beforehand.
3. Revenue Received
Though businesses and churches can both earn revenue by selling goods or providing services, the main difference is that most of what churches receive comes from donations, like tithes and offerings.
Because of this, they must keep track of how much money is received and which fund it is being used for. They also must be able to provide statements to their contributors along with other tax-related regulations.
4. Accounting Terminology
Though it may not seem important, the differences in terminology can play a key role. For example, instead of retained earnings, nonprofits categorize them as net assets. Net income is the excess of revenues over expenditures.
These uses of varying terms can make it difficult for churches to adopt bookkeeping software that wasn’t designed for the church. Though it isn’t impossible to do, having accounting software designed for churches will help organize everything finance related.
While some overlap exists, there is still a significant difference in church accounting vs. accounting for business. Understanding those differences and using tools and methods designed for the church is a great way to ensure financial health.
Need help figuring out what accounting software is right for your church? We’d love to help. Get in touch with us here!