of the content of that narrative.”15 How does the narrative and ensuing social ethics of the accounting profession (community) relate to the kind of narrative that determines the life of the church as a communion?
We will engage with various dimensions of this narrative from multiple angles as we dynamically formulate a combined theology of accounting and money in every chapter of this book. This book provides students with the basic resources and skills to engage the accounting dimension of ministerial leadership; to enter into the imaginative landscape of church leadership via the portal of accounting.
The Basics of Accounting
Accounting
There are two ways to understand what accounting is. First, you consider it as a history of your church in numbers, figures, and statistics. It is snapshot of the financial status of the church. Second, it is a means of organizing and presenting key information and data of the church in financial terms. Accounting as a photograph or means of reporting on the resources of the organization works by producing financial statements, which help to evaluate the performance of the church and estimate its future prospects.
How Does Accounting Work?
Each transaction is entered into a book or journal. Each is entered twice or has two sides to it, positive and negative. Each entry has its own mirror image. When the entry is positive it is called debit. The negative is called credit. This way of keeping each transaction as two components is called double entry bookkeeping. The debits and credits in the book must be equal and this is what keeps the book balanced.
Before the accountant can record transactions in the ledger or journal the organization needs to make a decision on how to recognize its revenues or expenses. It can account for transactions on the basis of cash or accrual. The organization either focuses on recording when resources are used or gained instead of when cash is finally paid or received for them. Churches can choose to recognize revenues or expenses when cash has been received or expended irrespective of the time of the service. For instance, pledges will not be recognized as cash until actual money is received even if the person making the pledge has an impeccable pledge redemption record. This is what cash accounting means. On the other hand, accrual accounting records revenues when earned and not when received and recognizes expenses when incurred instead of when they are actually paid off. For a church on the cash method, water bill for December 2011 will not be included in the expenses of that year if the actual payment was made in January 2012. Many churches use a modified or hybrid system that combines the features of cash and accrual accounting methods.
The principle of consistency requires that once a church has chosen a method it should stick to that method for the sake of comparability of reports across time. It is not a measure of good practice to change from cash to accrual in one year and in the next go back to cash accounting.
The record of revenues and expenses under each of this method of recognition has to also pass the test of matching. This is to say accountants try to match expenses of producing a service or product with the revenue associated with the service or product. Part of the activities of the accounting departments in any organization is to ensure that expenses are measured, recorded, and reported in such a way that identify them with their associated revenues.
Though expenses and revenues are to be matched, accountants bring different attitudes to them. The rule (the principle of conservatism) is that the accountant should be quick to recognize expenses and losses, but slow to recognize revenues and gains. The reason being that he or she should work to avoid the overstatement of values of assets and owners’ equity.
The conservative attitude does not mean that accountants record all insignificant events or every outlier for the sake of completeness. They make judgment about what to observe and measure with the aid of the principle or concept of materiality. They observe, measure, record, and report important things. The only problem is that it is difficult to draw a bright line between important things and insignificant transactions and events.
Before accounting statements are prepared and reported a decision also has to be made with regard to the accounting period a church wants to use for its reporting purposes. The period is usually a year and the church’s financial statements must include a description of it. The description enables the reader to know for what period income or cash flows has been measured. Statements are usually twelve months apart, but a church can also choose to present quarterly statements.
Values in financial statements are at historical cost, less depreciations or repayments. Traditionally in the United States accountants will not measure, record, and report assets in the balance sheet at current market value. So when current revenues are matched with expenses, the expenses are recorded only at their historical values. In times of high rate of inflation and rapid changes in the purchasing power of a national currency, this simplification (cost concept) does not augur well for sound economic decision-making.
In another vein the reports of the church treat the church as a going concern and as such the usual financial statements will not present the liquidation value of the church. The preparers of financial statements will assume that the church will operate indefinitely as a going concern. It does not matter that some in the church think that the church is better dead, liquidated than for it to continue to be operated as a going concern.
The measurement, recording, reporting of expenses and revenues, and of all other categories in the balance sheet, income statement, and statement of cash flows are presented only in terms of money. So whatever is difficult or impossible to observe and measure in common monetary units does not get reported. For this reason, among many others, it is important for the pastor to know that financial statements do not present a complete picture of the church. It will not cover knowledge, skills, reputation, and faithfulness of the members that have not yielded revenues but can ensure the continued survival and flourishing of the church. As with the methodology of National Product (GNP), products and services “outside” the market system are not counted, measured, and reported in the measurement of national income. In both cases, unpaid volunteer work is not counted.
Financial Statements
1. Balance Sheet (Statement of Assets and Liabilities)
2. Net Assets
3. Statement of Revenue and Expenses (Income Statement)
4. Statement of Cash Flows
5. Fund Accounting
6. Auditor’s or Accountant’s Report
7. Footnotes
Balance Sheet (Statement of Assets and Liabilities)
The balance sheet shows you the current economic status of the church at a given date. This snapshot of the financial information of the church captures the assets, liabilities, and owners’ equity (net assets). The balance sheet presents the assets and liabilities of the church at a given date. The values of assets and liabilities as recorded in the balance sheet are not the original costs; they are the original cost of assets less of depreciation (portion of the original cost included in expenses of preceding periods) or cost of liabilities less payments and extinguishments. Land is almost always reported on the balance sheet at its original cost. As you move down the balance sheet the quality of line numbers drops. This is true for assets and liabilities. Doubt about their true value increases.
Assets are resources of the church that can earn income or can yield future economic benefits. This includes buildings, vehicles, equipment, furniture, cash, prepayments, investments in bonds, securities, and stocks, claims, and so on. Assets are things or securities that the church owns which can be exchanged
