Negative Equity Account

[jordan2k510]

I created an equity account to hold the balance for restricted funds for a church sign. The sign is fully paid now yet the equity account has a negative balance. How do I remove this?

[JohnDMeyers]

Actually, in a double-entry accounting system, like PowerChurch, you don't "remove" things. You make corrective transactions.

Run an Account Activity report on the equity account, and see if you can determine where the "extra" entry that made it go negative came from.

I'll make a guess. I think your expense account for this restriction closes-to the restricted equity account, when it should close-to the unrestricted equity account. If so, let me know. The fix is pretty simple.

The accounts that should be in the Account Activity report should be (I'll make up some numbers):
01-4210-000 Restricted Income
01-4810-000 Specific Release

And that's all. There shouldn't be any other accounts that close to this account.

[jordan2k510]

I set up the sign as follows:
1920 Sign Asset
3220 Sign Equity
4220 Sign Income closes to 3220
4820 Release Sign Income closes to 3220

when I paid the sign company
checking CR
1920 Sign Asset DB
Should I have also used an expense account even though I plan to depreciate the sign?

Details:
4220 had $6809 contributions
4820 rel $7579 (cost of the sign) Contributions were $770 less than sign. Balance to come from General Fund. Yet I continued to book the payments to the sign company as indicated above.
Diff $-770 (what to do with this?)
1920 balance $7579 value of sign (before any depreciation)

If I create the folllowing JE will it solve the neg bal remaining in the equity account?
DB Sign Expense account $770
CR 3220 $770

[JohnDMeyers]

DB Sign Expense account $770
CR 3220 $770

No. I wouldn't recommend that.

You should release only the amount you have restricted, instead of $7,579. Assuming you did this:
DB 4820-000 Sign release $7,579
CR 4999-000 General release $7,579

I would recommend this correction entry:
CR 4820-000 Sign release $770
DB 4999-000 General release $770

Everything else is fine. Technically the $770 came out of unrestricted income, but that will become evident in your financial statements without any further entries.

If you want a 10-year depreciation on your sign (please verify the time period yourself), then each year, the depreciation entry would look like this:
CR 01-1990-000 depreciation reserve $758 (note: this will be a negative amount on your balance sheet)
DB 01-5990-000 depreciation expense $758 (note: this is a non-cash expense, or "book entry" only)

Note that the 1920 sign asset account will always show $7,579 until the asset is retired at the end of ten years. The depreciation reserve (asset) account is the cumulative total depreciation for all of your depreciated assets. It will increase by -$758 each year just for the sign asset, and presumably increase by other negative amounts due to other depreciating assets.

At the end of ten years, this is how you "retire" the sign asset:
CR 01-1920-000 Sign Asset $7,579
DB 01-1990-000 Depreciation Reserve $7,579

[JohnDMeyers]

I will explain the non-cash expense or "book-entry" in the above comment.

Your furniture, computer equipment, signs, etc. "lose" value each year as they get older. This is what accountants call "depreciation". In order to accurately assign a book value to the assets of your church, the depreciation entry is made.

Each year, you assign yourself a loss, or expense, equal to the lost value of all of your assets for that year.

You are not taking money out of your checking account. Rather, the value is lost "into thin air". It just evaporates (my non-accountant term for depreciation).

In order to show the true financial condition of the church at an annual meeting, for example, it is typical to show a Balance Sheet, an Income and Expense Statement, and a Cash Flow statement. The latter, (cash flow) shows that some expenses are not reflected on the Income and Expense statement. These include depreciation, unrealized market gains and losses on investments, cash used to purchase assets, and principle payments on loans.

[JohnDMeyers]

Let's say that all of your other depreciated items have a current depreciation of $2,000 on "all other furniture/equipment assets" of $20,000, and everything depreciates in 10 years.

Just before you put your "sign" into PowerChurch you see this on a Balance sheet:

All other furniture/equipment $20,000
Depreciation Reserve -$2000
--------------------------------------------
Total Furniture/Equipment $18,000



Then, you enter your sign and the first year depreciation and you see this on your Balance Sheet

All other furniture/equipment $20,000
Sign $7,579
Depreciation Reserve -$2,758
--------------------------------------------
Total Furniture/Equipment $24,821



The next year your cumulative depreciation is $4,000 plus $758 plus $758, again.
So your Balance sheet looks like this:

All other furniture/equipment $20,000
Sign $7,579
Depreciation Reserve -$5,516
--------------------------------------------
Total Furniture/Equipment $22,063


(...) year 10:


All other furniture/equipment $20,000
Sign $7,579
Depreciation Reserve -$27,579
--------------------------------------------
Total Furniture/Equipment $ 0



My point is that your "sign" asset still shows $7,579. It is the depreciation that increases (becomes more negative).

[jordan2k510]

Thanks John. As always you are very thorough in your explanations. I entered the JE as you indicated and see how it will zero the equity account at the end of the month. One last question..Since we collected less designated contributions than the sign actually cost ($770 less to be exact) should I indicate this somehow as an expense to the General Fund?

[JohnDMeyers]

Remember that expense or asset accounts have nothing to do with donor restrictions.

That being said, it is not wrong to point out things on your financial statements. Since you are using an asset account, you could break the amount into two parts:

For example: create
01-1920-000 GROUP asset level 4
01-1920-001 Sign from designations, detail, level 6
01-1920-002 Sign from general fund, detail, level 6

CR 01-1110-000 checking $7,579
DB 01-1920-001 Sign from designation $6,809
DB 01-1920-002 Sign from general fund $770

Release:
DB 01-4820-000 sign release $6,809
CR 01-4999-000 general release $6,809