The Chart of Accounts and General Ledger

Chart of Accounts

The chart of accounts provides a standardized framework for categorizing and classifying financial transactions. Each account is assigned a unique account number, which helps in organizing and identifying the accounts within the system. The account structure allows for accurate recording, reporting, and analysis of financial data. This enables the organization to track its financial activities and make informed decisions.

1 Accounts: Assets

Assets represent what the organization owns and controls. They have a positive economic value.
Examples: Bank accounts, investments, cash on hand, property, equipment.

2 Accounts: Liabilities

Liabilities represent what the organization owes to others, including debts and obligations.
Examples: Payroll deductions (e.g., taxes, employee benefits), loans, accounts payable, mortgages.

3 Accounts: Funds

Funds are designated accounting entities that fulfill specific purposes. Each fund has its own income and expenses. The fund balance represents the net value remaining in each fund.
Examples: General Operating Fund, Building Fund, Outreach Fund, Youth Fund, Benevolence Fund.

4 Accounts: Income

Income accounts track the sources of funding or monetary receipts the organization receives.
Examples: Walk-A-Thon donations, rental income, investment interest, fundraising proceeds, membership fees.

5 Accounts: Expense

Expense accounts track the costs incurred by the organization in its operations.
Examples: Office supplies, utilities, payroll expenses (salaries, wages), rent, maintenance, program expenses.

The General Ledger

In a church fund accounting system, the general ledger is crucial as it is the central repository for all financial transactions and account balances. It is a core component of the accounting system and provides a comprehensive record of the organization's financial activities.

Accounts are all assigned a number in the Chart of Accounts, which organizes assets, liabilities, funds, income, and expense accounts. Financial transactions are recorded using a double-entry bookkeeping system, wherein each entry has both a debit and credit. As transactions are recorded, the balances of the accounts are updated.

Subsidiary accounts or subsidiary ledgers are linked to a main account where transactions are posted to the sub accounts. These can only be reported as a group and differ from Subtotals, which are more flexible and allow more movement.

The general ledger provides an audit trail by recording all financial transactions and changes in account balances. This trail allows for transparency and accountability in the fiscal management of the church. It also helps in internal control, ensuring proper checks and balances are in place to prevent errors, fraud, or misappropriation of funds.

Double-Entry Bookkeeping

In a double-entry bookkeeping system, every financial transaction is recorded by making entries in at least two accounts, ensuring that the accounting equation (Assets = Liabilities + Fund Balances) remains in balance. Here's how the different types of accounts relate to each other:

1 - Assets

Increase: Debit entry
Decrease: Credit entry

Assets are debited when they increase, such as when cash is received or when an asset is acquired. They are credited when they decrease, such as when cash is spent or when an asset is sold.

2 - Liabilities

Increase: Credit entry
Decrease: Debit entry

Liabilities are credited when they increase, such as when a loan is taken or an account payable is created. They are debited when they decrease, such as when a loan is repaid or an account payable is settled.

3 - Funds

Increase: Credit entry
Decrease: Debit entry

The Fund Balance account within each fund is typically used to represent the total value remaining. A credit impact is made to the Fund Balance account when a fund receives income or its value increases. When expenses are incurred or the fund's value decreases. These are the residual effects of the transactions and not directly recorded to the fund balance account. Transfers between funds are one of the few direct transactions to fund accounts.

4 - Income

Increase: Credit entry
Decrease: Debit entry – not typical

Income accounts are credited when income is earned or received. Sometimes there could be an expense that offsets an income account, but this is not usual.

5 - Expense

Increase: Debit entry
Decrease: Credit entry – not typical

Expense accounts are debited when expenses are incurred or paid. Some people make donations for flowers expense on special occasions. This may be recorded in the flowers expense account to reduce the overall expense.

The relationship between these accounts is based on the principle of double-entry bookkeeping, which ensures that each transaction is recorded with equal debits and credits. This ensures that the accounting equation remains in balance and provides a complete and accurate representation of the organization's financial activities. By properly recording transactions in the appropriate accounts, the relationships between the accounts reflect the inflows and outflows of funds, changes in assets and liabilities, and the allocation of income and expenses within the organization.

Transactions and Journal Entries

  • INCM (Income): This transaction type is used to record income or revenue received by the organization. It affects income accounts, such as donations, offerings, fundraising proceeds, rental income, or any other sources of income for the organization.

  • BILL (Expense): The BILL transaction type records expenses incurred by the organization. It affects expense accounts and represents the payment or obligation to pay for goods or services received. Examples of expense accounts include office supplies, utilities, salaries, rent, and other operational costs.

  • PYMT (Payment): The PYMT transaction type is used to record payments made by the organization. It affects the liability accounts and represents the settlement of outstanding obligations. It Pays the BILL entered in 2. and liabilities transferred from PYRL or other liabilities. Examples of liability accounts include accounts payable, loans, or any other amounts the organization owes.

  • TNFR (Transfer): This transaction type is used to record transfers of funds between different accounts of the same type.

  • ARIN (AR Invoice): The ARIN transaction type is used when creating an invoice for accounts receivable. It affects the accounts receivable account, which represents amounts owed to the organization by its customers or donors. This transaction type is typically used when billing for services rendered or selling goods.

  • JRNL (Journal Entry): The JRNL transaction type is a general journal entry used to record various non-routine or adjusting entries. It can be used to make corrections, allocate expenses, or record any other financial transactions not covered by the other transaction types. It can affect multiple accounts depending on the nature of the entry.

  • PYRL (Transferred Payroll): The PYRL transaction type records transferred payroll transactions from the Payroll module. It affects the accounts related to payroll expenses, such as salaries and wages, payroll taxes, benefits, and any other payroll-related accounts. These transactions will be entered as Journal Entries when using an external Payroll system.

  • ARCL (Collection): The ARCL transaction type records the collection of accounts receivable. It affects the accounts receivable account by reducing the outstanding balances when payments are received from customers or donors