Basic Accounting Framework for the Church

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Accounting Is Not Optional

About ten years ago, I donated accounting software to a local church where I used to worship in Lagos and offered to train those who will use the software for free. I thought I was doing a great thing helping my church, and I expected the pastor to be happy about the prospect of having a modern tool to help the church manage its finances. I waited patiently for the pastor to arrange for the deployment of the software (the church already had a computer) and the training, but nothing happened. However, after about four weeks, instead of the appreciation I was expecting, what came out were voices from the pulpit lambasting people “who think they can teach the Holy Spirit how to spend God’s money”. I did not need the Holy Spirit to tell me who these innuendos were directed at. That was the end of the software story.

The root of corruption in our society is not necessarily greed; it is the absence of transparency and lack of clearly defined standards for accountability. When people know that every of their financial activities will leave a trail, they will think twice before they embark on any dubious activity. Everywhere—from public to private sector—there is a clear evidence of a complete absence of bookkeeping and accounting culture. One would have expected the church, which is seen as a beacon of morality and ethics, to fare better, but the situation is even more appalling in the House of God.

Many church leaders have this feudal mindset of the regarding church money as something they can spend as the “Holy Spirit leads” them since they see themselves as God’s progenitors who should only be accountable to God. Accounting is not about spending or not spending money—it is about keeping proper and accurate records of what you are doing with the money so that when the time comes for rendering accounts you will have something to show in black and white, instead of making gestures or bellicose rambling. And this accountability includes disclosing where the cash is coming from and where it is going; the people you owe and those owing you; the value of all the church assets and their depreciations, liabilities etc. Someday, an argument or even litigations may arise. Besides, doesn’t the church owe its congregation any measure of accountability?

I am fully aware of the fact that there are a few exceptions—the Anglican Church being one notable example. The Anglican Church issues members receipts for every collection outside the normal congregational offerings. These include tithes, pledges, levies, etc. It is also a standard practice for the church to present statement of income from all sources for the previous week before the congregation every Sunday as part of Sunday Service rituals. The Anglican Church also presents detailed audited annual financial statements.

The reason many NGOs (Non-Governmental Organizations) in Nigeria cannot benefit from foreign donor agencies is largely due to lack of proper and transparent accountable system. No foreign donor will be willing to trust you with money without evidence of good accounting and feedback system—just in the same way the banks are not going to trust any company with a loan facility without good accounting.

Generic Accounting Template for the Church

Perhaps, part of the reason the church is so lethargic when it comes to accounting could be attributed to lack of well-defined accounting standards for managing church finances. The Church, as an accounting entity, falls within the category classified as Not-for-Profit (NFP) Entities. Other categories of accounting entities include:

  • Quoted (or Listed) companies, and companies with significant public interest
  • Small and Medium Enterprises (SMEs)
  • Public Sector Entities

In 2010, Nigeria signed on to two international accounting standards—International Financial Reporting Standards (IFRS) and the International Public Sector Accounting Standards (IPSAS). The implementation roadmap for these Standards showed that Quoted companies adopted IFRS in 2012, while SMES adopted IFRS for SMEs in 2014. The public sectors adopted the Cash-basis IPSAS in 2014 and migrated to Accrual IPSAS in 2016. However, there is yet no international or universally acceptable standards of accounting for Not-for-Profit Entities, although the International Accounting Standard Board (IASB)—the body administering IFRS—has indicated that it is working on such Standards based on IFRS for SMEs.

Even in the absence of universal standards of accounting for NFP entities, the basic rules of accounting remain the same across different entities. Most of the differences are in the areas of classification, recognition and presentation. However, when one considers the operational structure of the church, it is obvious that the basic template for church accounting will embrace the policies of both IFRS and IPSAS. Here are some of the few key issues to consider.

Cash Vs Accrual Accounting

IFRS does not permit cash-basis accounting, but IPSAS provides for both cash and accrual accounting. The church should have the option of choosing between cash- and accrual-basis, depending on the transaction involved. Pledges, for instance, should be accounted for on cash-basis, while mandatory Levy should be treated on accrual basis. I will explain why later.

Classification

Accounting elements are generally structured into the following categories:

  • Assets
  • Liabilities (& Equities)
  • Income
  • Expense

Under IFRS, the last two elements (Income & Expense) belong to what is called Profit or Loss, and Income is sub-divided into Revenue and Other Income—with further sub-division for Revenue. However, under IPSAS, there is no provision for Income—everything is classified as Revenue. But Revenue is sub-divided into Revenue from Exchange Transactions and Revenue from Non Exchange Transactions under IPSAS.

Revenue from Exchange Transactions

This is the revenue arising from the sale of goods and services by public sector entity. Goods and services are provided to the public or other organs of government in exchange for payments. It could also be as a result of government selling its assets.

Revenue from Non-Exchange Transactions

This is the revenue from taxes, levies, duties etc. It is earned by virtue of statutory provisions and as obligation from the citizens and corporate entities operating within jurisdictions of the government.

The church needs to incorporate this classification in its chart of accounts and prepare its financial statement with separate disclosure for these two categories of transactions.

Recently, there have been controversies as to whether or not the church and other religious institutions should pay tax. The answer is Yes and No. The church and other religious institutions should pay tax on Revenue from Exchange Transactions (which include sale of goods and services to its members and the public), but revenue from Non Exchange Transactions (such as offerings, tithes, levies, pledges, donations, etc.) should not be taxed. And this should make it even more expedient to adopt this method of classification.

Below is a sample structure for classifying chart of accounts for the church.

Classification of Church Chart of Accounts

Revenue Recognition

I will only deal with revenue recognition here because the recognition criteria that apply to Property, Plant and Equipment under IFRS for SMEs also apply to the church. But when it comes to revenue recognition, a mixture of cash- and accrual accounting will have to be applied.

All items under Revenue from Exchange Transactions should be recognized on accrual basis in accordance with IFRS. Which means revenue is recognized as soon as the risks of ownership of the goods or service have been transferred to the buyer.

The following items under Revenue from Exchange Transactions should be recognized on cash basis. Which means, revenue should only be recognized after receipt of cash. The items include:

  • Pledges
  • Tithes
  • Offerings
  • Donations
  • All other non-legally binding contributions

However, when it comes to Levy, the Church should be allowed to use its discretions in deciding whether to account for it on cash or accrual basis.

When my Mother died, I was asked to inform the village church where my mother used to worship and invite them for the funeral. After the invitation, the first thing the church did was to check their records to find out whether my mother had any outstanding commitments. What outstanding commitments?Church levies, of course!

It thus appears Levies are Receivables for which members are under obligation to redeem, and should, therefore, be recognized as revenue on accrual basis. But what happens if some members fail to pay before the end of accounting year, or if some members decide to quit the church? Under these circumstances, the church will have to recognize Impairment Loss (which is reversible) in accordance with IFRS, before closing its books for the year.

PS
As part of our contributions towards the promotion of accounting and sound financial management, we are committed to providing general and bespoke IT tools and resources that help automate the processes and procedures of accounting. Our ExpressBook TreasureScroll integrated solution has been designed and built specifically for the church to handle its accounting and membership administration tasks.

About Uso Etim

Etim Uso is a systems analyst and a programmer with over 20 years of experience in the design and implementation of financial and business solutions. He is an IFRS/IPSAS systems specialist, and holds a Bachelor of Technology degree in mathemetics and computer Science from the Federal Univeristy of Technology, Owerri, Nigeria. He also holds a Certificate in Entrepreneurial Management from Enterprise Development Centre (EDC) of Pan-Atlantic University, Lagos. He has contributed to a number of discourses on important national and international issues, including the Nigeria Leadership Initiative's (NLI) White Paper (Volume 2) on Nigeria tax system. He was a guest columnist for the Nigeria's Businessday Newspaper throughout 2012, writing weekly on International Financial Reporting Standards (IFRS) and International Public Sector Accounting Standards (IPSAS). Mr. Uso has written a number of books and eBooks on accounting, including the following, all of which are available in the Amazon Kindle store: 1. IFRS Accounting Manual for Small Businesses 2. IFRS Accounting Manual for the Real Estate 3. How to Master IFRS Accounting for Hotels with 3 Easy Steps. www.accountingbychoice.com is his blogging and marketing platform on financial and business solutions.

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