Church Financial Statements: Church Financial Report, Balance Sheet and Statement of Activities

What financial statements should a church prepare?

A church is a nonprofit corporation for accounting purposes, so the statement set follows FASB ASC 958 and uses nonprofit names. The statement of financial position is the balance sheet: assets, liabilities and net assets, with no owners equity line because a church has no owners. The statement of activities is the income statement: contributions and other revenue, expenses, and the change in net assets for the period. The statement of cash flows works the way it does everywhere else. Churches that produce full GAAP statements also present expenses by function, which for a congregation usually means worship and ministry programs, missions, administration, and facilities.

What makes a church report different from a generic nonprofit report is the fund layer sitting underneath all of it. A church rarely has one pot of money. It has a general operating fund, a building or capital fund, a missions fund, a benevolence fund, and often a handful of smaller ones a previous board set up and nobody has closed. The board question every month is not only whether the church ran a surplus, it is how much is left in the building fund. That answer does not appear anywhere on a standard four statement set, which is why almost every church adds a fund balance schedule.

The second difference is the budget column. In a for-profit business, last year is the comparison that matters. In a church, the budget approved by the congregation or the board is the comparison that matters, because the budget is a commitment made to the people who gave the money. A statement of activities with a budget column, a variance column and a percent of year elapsed reference is the format that answers questions instead of raising them.

Our nonprofit financial statements page covers the ASC 958 statement set in full, including the statement of functional expenses, and the nonprofit statement of activities guide walks its layout line by line. This page covers what changes when the nonprofit is a church.

What should be included in a church financial report?

The monthly package a church treasurer presents to a board or finance committee is smaller than a full audited statement set and larger than a checkbook summary. The table below is the format most US churches settle on, with what each section is for and who reads it. Treat the annual column as the version that goes to the congregation and the monthly column as the version the board works from.

Two presentation choices separate a report people read from a report people nod at. The first is showing the budget beside the actual on every line, with the dollar variance and the percent of the annual budget used. A giving line that is down $4,100 against budget in a month where the church is four months into the year and has collected 31 percent of budgeted contributions is a trend, and only the percent column makes that visible before December.

The second is separating restricted activity from operating activity on the face of the statement. A church that received a $60,000 capital campaign gift in March and shows it in one undifferentiated revenue column will appear to have had an extraordinary month, and the board will make a staffing decision on a number that was never available for staffing. Two columns, one for amounts without donor restrictions and one for amounts with donor restrictions, is the presentation ASC 958 asks for and it happens to be the presentation that prevents that mistake.

Beyond the statements themselves, a complete monthly package usually carries a cash and reserves summary (operating cash, how many months of expenses it covers, and any designated reserve), a fund balance schedule, a giving summary by month against prior year, and a short narrative from the treasurer explaining what moved. Building that same package every month rather than reconstructing it is the subject of our monthly financial reporting package page.

Church fund accounting: restricted, designated and general funds

This is where most church books go wrong, and the distinction is legal rather than stylistic. A restricted fund exists because a donor imposed a restriction when they gave. Someone wrote "for the roof" on the memo line in response to a roof appeal, and that money is legally committed to the roof. The board cannot vote to spend it on salaries. If the restriction becomes impossible to satisfy, the church has to go back to the donor or, in some states, to a court.

A designated fund exists because the board decided to set money aside. There was no donor condition. The board voted to hold $25,000 for a future van, and a later board can vote to unhold it. Under ASC 958 designated amounts are net assets without donor restrictions, because the only thing restricting them is the board that can reverse the decision. Churches that present board designations as restricted are overstating the portion of their net assets that is legally unavailable, which is the specific number a lender or a denominational office will look at.

The practical rule that keeps a church out of trouble: a donor restriction comes from what the church asked for and what the donor wrote, in that order. If the church runs a benevolence appeal, gifts to that appeal are restricted to benevolence even if nobody wrote anything on the check, because the solicitation created the restriction. If a member writes "for the youth trip" on an unsolicited gift and the church accepts it, the restriction is real. The way to avoid accumulating dead restricted balances is to say so in the appeal: language stating that funds beyond what the project needs will go to the general fund is enforceable and is written into most well-run capital campaigns.

On the books, funds are usually tracked with classes in QuickBooks, tags in Xero, or native funds in a church accounting system. Whichever it is, the export has to carry the fund on every transaction line or the fund balance schedule cannot be built. If you use QuickBooks class tracking for this, our guide to running a QuickBooks profit and loss by class covers getting the export right, and it also explains the limitation that trips churches up: QuickBooks Online does not produce a true balance sheet by class, so fund balances have to be assembled from the activity rather than read off a report.

Do churches have to file financial statements with the IRS?

No, and churches are the unusual case here. A church that meets the IRS definition is automatically recognized as tax exempt under section 501(c)(3) without filing Form 1023, and under IRC section 6033(a)(3) churches are excepted from the annual Form 990, 990-EZ and 990-N filing that applies to essentially every other exempt organization. Because a church never had a filing obligation, it also does not face the automatic revocation of exempt status that hits nonprofits which miss three consecutive years. The governing IRS reference is Publication 1828, the tax guide for churches and religious organizations.

Several churches still file a Form 990 voluntarily, and some denominations require it internally, because a public filing is the simplest way to demonstrate transparency to donors who have learned to look organizations up. That is a choice, not a requirement. Some churches also choose to apply for a determination letter even though they do not need one, usually because grantmakers and some state agencies ask for it.

The filings a church does have are payroll and, occasionally, unrelated business income. Form 941 quarterly for non-minister employees, W-2s in January, and Form 990-T if the church has $1,000 or more of gross unrelated business income, which most often turns up as advertising revenue, debt financed rental income, or a parking lot rented commercially during the week. State requirements are separate and vary: several states require a charitable solicitation registration and some exempt churches from it, and property tax exemption on church owned property is a state and county matter with its own paperwork.

None of that removes the reason to produce real statements. The audience is the congregation, the board, a bank underwriting a building loan, and a denominational office. A bank looking at a church mortgage will want two to three years of statements, a giving trend, and the fund detail, and our financial statements for a business loan page covers what a lender package needs to contain.

Church payroll and the clergy housing allowance on the statements

Compensation is the largest line on almost every church income statement and it is the line with the most specific rules. Ministers have what the IRS calls dual tax status: for federal income tax they are employees of the church and receive a W-2, but for Social Security and Medicare on their ministerial earnings they are treated as self employed and pay SECA. The church does not withhold or match FICA on a minister and matching it as a courtesy creates a problem rather than solving one. Non-minister staff are ordinary employees with ordinary withholding.

The housing allowance is the piece that most affects how the statements read. A minister can exclude a housing allowance from federal income tax, but only if the church designated it in advance by official action, in writing, before the pay period it covers. A retroactive designation does not work. The excludable amount is the lowest of three figures: the amount the church designated, the actual housing expenses the minister paid, and the fair rental value of the home furnished plus utilities. The allowance is still subject to SECA. On the statement of activities the allowance sits inside pastoral compensation as an expense like any other salary component; what changes is the W-2 treatment, not the accounting.

The reporting risk here is presentational. Churches that break compensation into six lines (salary, housing, benefits, pension, payroll taxes, continuing education) and publish that detail to the whole congregation have effectively published one household budget. The convention most churches use is a single pastoral compensation total on the congregational report with the detail available to the finance committee, which keeps disclosure honest without turning the annual meeting into a salary review.

One more line to get right: love offerings and gifts collected for a pastor. Money the church collects and passes to a minister is generally taxable compensation reportable on the W-2, not a tax free gift, and it is not a deductible charitable contribution for the giver when it is designated to a specific individual. Recording it as anything other than compensation creates a W-2 error and a donor acknowledgment error at the same time.

Contribution statements are not financial statements

Two different documents get called a church financial statement and it is worth separating them. The annual giving statement goes to each donor and reports what that household gave. The financial statements report what the church did with all of it. Church management systems produce the first and generally do not produce the second, which is the gap most treasurers are standing in when they start looking for software.

The giving statement has its own IRS rules and they are worth stating exactly, because getting them wrong costs your donors deductions. A donor cannot deduct any single contribution of $250 or more without a contemporaneous written acknowledgment from the church, and separate gifts are not aggregated to reach that threshold, so twelve monthly gifts of $200 do not require one and a single $250 gift does. The acknowledgment has to state the amount of cash received and either state that no goods or services were provided in return or describe and value what was. Contemporaneous means the donor has it by the earlier of the date they file the return or the filing deadline, which is why churches send January statements. For a quid pro quo contribution over $75, where the donor received something in exchange, the church must give a written disclosure stating that the deductible amount is limited to the excess over the fair market value of what they got. IRS Publication 1771 is the reference.

The two documents also have to agree. Total contributions on the giving statements should reconcile to total contribution revenue on the statement of activities, with a documented explanation for the difference: non-cash gifts, gifts from anonymous or non-tracked givers, loose plate offerings, and any amounts recorded as revenue for a different period. A treasurer who can produce that reconciliation on request has answered most of what an audit committee would ask.

From a QuickBooks or Aplos export to a church statement pack

Export the profit and loss and balance sheet from whatever holds the books, or upload a CSV trial balance, and the accounts are classified into the church format automatically: contributions split between general, designated and restricted, program and ministry expenses, personnel, facilities, missions and administration. Anything the classifier is not confident about is shown to you for a decision rather than placed silently. The mechanics of that account to line item step are covered in trial balance to financial statements and in more depth in our trial balance mapping guide.

The mapping is saved, so next month is an import rather than a rebuild, and a fund or account someone added mid year is flagged instead of dropped into the wrong line. Load the approved budget once and the statement of activities comes back with actual, budget, variance and percent of budget columns without anyone rebuilding a spreadsheet the week before the board meeting.

Output is a statement of financial position, a statement of activities with the two net asset classes and the budget comparison, a statement of cash flows, and a fund balance schedule showing opening balance, additions, releases and closing balance for each fund, plus a written summary of what moved and what is worth a question. Delivery is a formatted PDF for the board or the congregational meeting and XLSX when the finance committee wants to work in the numbers. Plans start at $39 a month. See the pricing page for the tiers, the balance sheet generator and cash flow statement generator pages for the individual statements, and financial statement software for accounting firms if you prepare these for several congregations.

What this does not do

This is a statement generation tool, not a church management system and not a church accounting ledger. It does not take online giving, run a donor database, produce individual contribution statements, manage membership or attendance, or run payroll. Products built for that job include Aplos, PowerChurch, ChurchTrac, Realm and Blackbaud, and many churches run QuickBooks with a giving platform in front of it. If you do not have books yet, start there, not here.

What this does is the step after: turning whatever those systems export into a statement set that reads like something a board, a bank or a denominational office expects to see, every month, without a treasurer rebuilding a workbook. Churches with a volunteer treasurer and a bookkeeper on a few hours a week are the common case, and so are accounting firms carrying ten or fifteen congregations where the reporting is identical every month and the manual work is entirely in the formatting.

It also does not replace an audit. Larger churches and those with denominational requirements have an annual audit or review performed by a CPA firm, and where that applies, the statements produced here are the starting point the firm works from rather than the finished product. The distinction between a compilation, a review and an audit is covered in our compilation vs review vs audit guide.

Common questions