Recording and Using Designated Funds
When people donate to a specific purpose at the church, they express an interest in a particular part of the church beyond their general offering. Keeping those funds identified separately is one of the tenets of fund accounting for which commercial accounting has no concept or ability to do correctly.
It is important to note that a separate bank account just for donor-designated donations is not required and can often lead to needless problems in counting, depositing, writing checks, transferring funds, additional transactions, and reconciliation.
The following examples use the ACST-recommended account numbering scheme:
- 1000 Assets
- 2000 Liabilities
- 3000 Net Assets without Donor Restriction
- 4000 Income
- 5000 Expenses
- 8000 Net Assets with Donor Restriction
First Method
There are two ways to account for donor-designated funds. The first is to use a Net Asset account directly in which to recognize the deposit and from which to pay for the designated invoices. For example, a donation to the music program at the church:
1000 General Operating Bank Account $1,000.00
8300 Music – Donor Designated $1,000.00
To expend the donor-designated contribution for music purposes, one simply writes the check and removes the contribution from the designated account. For example:
8300 Music – Donor Designated $ 500.00
1000 General Operating Bank Account $ 500.00
(Check to Holy Smoke™ Music Company for annual music license)
The details for the income and expense for the donor-designated amounts for music are reported in the Statement of Restricted Accounts, which shows the additions to and expenditures from the 8300 Music – Donor Designated Account for a specified time period, generally a month. Further information is available about a specific transaction by conducting an inquiry of the 8300 account which lists each transaction in detail.
The same approach may be used for Board, Session, Vestry, Deacons, Council, i.e. Church Governing Body, and designated accounts such as: 3300 Maintenance Reserve.
Second Method
An alternative method is to account for the donation and expenditure using Income and Expense accounts in the Statement of Activities with closing to a Net Asset account in the Statement of Financial Position.
Using the music example, deposit the donation into the general operating bank account and recognize the contribution as Revenue:
1000 General Operating Bank Account $1,000.00
4300 Music – Donor Designated $1,000.00
When the money is spent for the donor’s intended purpose, write the check and charge an Expense account:
5300 Music – Donor Designated $1,000.00
1000 General Operating Bank Account $1,000.00
Note that the money is not commingled with general revenue or with general operating expenses! It still requires separate accounts, just more of them than the first method.
At the end of the year, the closing account for both the income and expense account is to
8300 Music – Donor Designated. The Chart of Accounts should be set up such that the income and expense accounts are closed to the Net Asset account, 8300 Music – Donor Designated, and not to the 3000 General Fund Balance. Note that one has to wait until the end of the year for the accounting system to recognize the balance remaining of the donor restricted contributions when the year-end closing of the books takes place. Often, they are not closed until some time in the following year, adding confusion to the real available balance.
Reporting of the donor designation in this second example is done on the Statement of Activities. However, this requires the reader of the Statement to mentally subtract the year-to-date Expense from the year-to-date revenue to arrive at the remaining balance in the Donor Restricted Fund.
Budgeting
Most people do not know that a 3000 or 8000 account can have an assigned budget amount; they can. Here is a scenario regarding how to use a combination of donor-restricted contributions and operating expenses to pay for the music program at the church.
First Method
In my church, we have a specific donor who will always pledge and contribute $6,000 each year for the music program. When our governing body sets the budget for the next year, they estimate the cost of the music program, for example, $60,000, and allocate the budget (using the first method above) as follows:
Music Budget
Operating expenses 5100 Music $54,000
Donor Designated expenses 8300 Music – Donor Designated 6,000
Total Music Budget for the year $60,000
This example only works for the first method.
Second Method
The second method is self-fulfilling by allocating the budget as follows:
Music Budget
Operating expenses 5100 Music $54,000
Donor Designated Income 4300 Music – Donor Designated 6,000
Donor Designated Expense 5300 Music – Donor Designated ( 6,000)
Total Music Operating Budget for the year $60,000
ACS or Realm
How these two methods are implemented in the Chart of Accounts in ACS is slightly different than how it is implemented in Realm. Contact ACST Technical Support if you have questions.
James Jordan
James Jordan is the Managing Member of James B. Jordan CPA, LLC, a nationwide full-service CPA firm that exclusively focuses on churches and specializes in ERC services. He has been a frequent speaker at ACS Technologies conferences, teaches financial management for clergy at Emory’s Candler School of Theology, and is the author of Financial Management for Episcopal Parishes.
