GAAP (at Churches especially)Functional Exp Overkill 0919-03 ZZfwi

                    TO:   All Interested Onliners                                                                  FROM: Jim Bramer. Retired CPA-Auditor
                                                                                                                                          FILE:  0919-03/fwi

                    RE:   Church & Functional Expense (GAAP) Overkill                    Originated in July 2002      

       Today's  "FOR WHAT IT IS WORTH" editorial             

    To  remind you,  GAAP stands for "Generally Accepted Accounting Principles",  or rules and regulations that CPA-Auditors must follow when they render any type of year end audit, or when they do an attestation of a Church's (or any NPO - Non Profit Organization) finances.  Or as required by the IRS Form 990.  Please Go Here for more GAAP details

There are a lots of Non Profit Organizations (NPOs)  'out there'  who have less than $500,000 of annual income, but no doubt the vast majority of such NPOs are Churches, or such religious organizations. It seems that unique financial accounting aspects of  Churches include:

     a>    They are funded by local members/constituents and NOT via the general public.
     b>    Quite a bit of their annual income comes from Donor restricted income.
     c>    They are tax-exempt and do
NOT file annual IRS forms 990 like other NPOs so they
            usually do not
account for, or report, GAAP required  functional  expenses of
            Program, General/Administration and Fund Raising.
     d>   They do meet accounting system essentials as pointed out Here


      Financial accounting needs of such groups include current status/knowledge of such essentials as the following:

1> Pooled Operational Assets and Liabilities
2> Unspent donations by named restriction or purpose.
3> Unspent SetASides by the Board from discretionary funds for a named purpose
4> Status of authorized General Fund "Actual to Budget" info.

5> Applicable Income and Expenditures by named purpose or fund.

    Our view is that most of the GAAP requirements pertain to presentation of annual financial statements to non-Management.  You will notice that our GAAP views Here  divides such issues between that which pertains to "Daily/Monthly" and to "Year End"  GAAP issues.  Please note the Church aspects of below. 


     Applicable to a Church

Accounts Receivable (c)

Discuss with your CPA


Retail Goods (a)

Discuss with your CPA



Vendors/Plastic Payable (c)


Other Liabilities

Prepaid Income

Discuss with your CPA

Money belonging to Others


Operation Issues

(c) Income as Earned


(c) Expenditures as Incurred


(d) FAssets - Go Here


(d) Debt Obligations


                                                                        (a) Ask me about monthly "Cost of Goods" Accounting
                                                                        (b) Please Go Here  for more on this topic
                                                                        (c) Accrual basis of Accounting, or as Income earned/Expenses incurred.
                                                                        (d) Transferred only annually (at least) to FAssets/Liabilities"                                                                          

                  Pertains to Year End  Only

  •       Church

    Prepaid Expenses/Income

    Insurance Expense

    Year End Only

    Others-including Future Event activity

    Year End Only

    Inventory - Supplies

    Year End Only

    Update Investments to Fair Market Value (FMV) Year End Only

    Fixed Asset Capitalization

    See Above

    Reduction of Debt

    See Above

    Depreciation Accounting

    Year End Only

    Functional Expense Accounting

    Discuss with your CPA

    Pledge Accounting

    Year End Only

    Released Restrictions --
    Click here for more Info with an example

    Show Net Assets (Fund Balances) as:


    Year End Only

    Temp Restricted

    Year End Only

    Perm Restricted

    Year End Only


        We maintain that Fund Accounting software for Churches and like kind of Ministries serving members should concentrate on providing the above essentials and not provide Functional Expense/"GAAP Overkill."  This happens, in our judgment,  when "Year End" GAAP matters are unnecessarily included with "Daily/Monthly"  issues.  For example,  we maintain that it is not necessary for such Ministries to do the 'cost accounting'  of dividing up the functional expenses of  Program, General/Administration and Fund Raising.  Or is it necessary for such software to provide during the year Temporary Restricted or Unrestricted  Net Asset  reports.

We share some of our Fund Accounting perspective Here and Here  as we provide some information about using the usual Quickbooks product to meet these essential needs - especially at a Church.  Please Go Here  and view samples via   of  "during the year" reports of a larger church Then see samples of GAAP compliant annual Church reports Here.

        We are pleased to see more and more
software products are becoming available that speak to the unique NPO fund accounting and reporting needs.  But, it appears that too many contain Functional Expense/GAAP Overkill, as they are undesirably emphasizing the above  "Year End Only GAAP issues during the year -- especially with Churches and like Ministries in mind..
 We all need to remember that the priority of any accounting system is to meet management's day to day essentials  (as defined above)  so they can make informed and prudent financial decisions.  And not to structure for "Year End Only"  GAAP reporting requirements.  Management is not likely to make operating decisions based on whether departmental expenses are classified per the GAAP Functional Expense categories of: "Program, General/Admin or Fund Raising.

        In my humble opinion, I believe it is unnecessary to require your Church accounting system to do GAAP/Functional Expense assigning as part of each expense transaction. One reason is that most Church budget expense line items are greatly condensed for annual reporting purposes.  And my experience is that Fund Accounting is complicated enough and having an unnecessary  "During the year GAAP emphasis" distracts from timely providing the above named essentials.  Do the appropriate recapping at the year end (please Go Here for a sample) and at that time care for the "Year End"  GAAP requirements.   Contact me at  for more thoughts along these lines.

        We recommend that you use various Quickbooks (QB) fund accounting methods, especially Method One Here as the normal QB software
meets Church Management's above defined essentials.  A Church Ministry does NOT need the latest version of QB,  or Excelto make use of any of these methods. For example, someone recently shared with me that they paid $1.00 to a vendor for a complete QBPro2000 version.  

K E E P   L O O K I N G   U P !!

       CLICK HERE  for a list of of our "For What it is Worth" Editorials or Online documents.

UPTD: March 06, 2013