Unrestricted but Reserved Accounts

[ejsteffes]

Has anyone had any experience creating a reserve from savings that are not donor restricted, for example, existing funds that the Board wishes to earmark for a future expense? Is there any reason why we cannot create a special account within the net assets section of COA, and just move funds between that account and the existing Unrestricted Net Assets account (debiting one and crediting the other) as appropriate?

[JohnDMeyers]

First of all, yes, you can show a reserve amount.

I would do it as a separate asset account, rather than an equity account. If you are not using a separate bank account at the bank, you can show it as a sub-account of an existing checking or savings account.

The problem with showing a transfer from your bank account to an equity account is that you will have a transaction in your bank account on PowerChurch that will not reconcile with your bank statement, because you are "earmarking" the money, not transferring it.

We had a long discussion on this topic not too long ago:
http://powerchurch.com/forum/viewtopic. ... unt#p16691

[ejsteffes]

Thank you for your response. Actually, I wasn't thinking of transferring money from a bank account to an equity account, but transferring from the unrestricted (and unreserved) equity account to a new unrestricted but reserved equity account. The bank accounts can remain just as they are. Then I was thinking of handling annual set-asides to the reserve by debiting an expense account and crediting the reserve account. Expenditures from the reserve would be handled by debiting a special expense account that closes to the reserve and crediting the bank account. This has the advantage of allowing the annual set-asides to show up as expenses, but if it's outrageously unorthodox accounting I'll forget it!

Alternatively, we could stop thinking of the set-asides as expenses and treat them as transfers to a separate accounting fund. In any case, I would think it would be desirable to have some expense accounts or transfer accounts to show the movements in and out of the reserves. Can moving money between bank accounts or their sub-accounts really be the standard accounting solution to this problem?

[ejsteffes]

I’d like to post for consideration one other possible way of accounting for reserved (as opposed to donor-restricted) funds, such as funds set aside for future expenses. The goals of this approach are to get the reserves to show up in the net assets portion of the balance sheet, along with the donor-restricted funds, and to have the flows into and out of the reserves show up on the Income & Expense Statement.

If a reserve is thought of as a special part of unrestricted net assets, then placing funds in the reserve is similar in one respect to releasing restricted funds. Both transactions just move assets among different parts of net assets, adding here and reducing there without changing the total. This suggests that the accounting entries for the release transaction can provide some guidance in devising accounting entries for reserve transactions, although the latter involve funds that aren’t donor restricted.

To review the release transaction, assume that you have a donor-restricted Building fund in the net assets section of your COA. The release transaction credits an income account (Release From Restrictions) that closes to unrestricted equity. It debits another income account (Temp Restricted Release—Building) that closes to the Building fund. Since the accounts affected by the credit and the debit are both income accounts, the release transaction shows up on your Income & Expense statement as a wash: Total income remains the same, since income is only reclassified, not created or destroyed.

I suggest that a movement into or out of a reserve fund could be handled in a similar way. Create the reserve fund in the Unrestricted Net Assets section of your COA. Let’s call it the Painting fund for that big paint job that you’ve put off until next year. Create an income account called Painting Reserve Income that closes to the Painting fund, and a more general income account called Unreserved Income that closes to Unrestricted Net Assets.

To put money into reserve:
CR Painting Reserve Income
DB Unreserved Income

As in the release transaction, the flows will show up on the Income & Expense statement but total to zero, leaving total income the same.

To spend money from the reserve:
CR Bank account
DB Painting expense account
CR Unreserved Income
DB Painting Reserve Income

The second transaction bears a striking resemblance to spending money from a donor-restricted fund.

In this approach, setting aside money for the reserve is not treated as an expense, budgeted or otherwise. Your budget will just show the surplus that provides the funds to set aside. It only becomes an expense when you take it out of reserve and actually spend it.

This is just an idea, since we haven’t actually done this yet, so I’d appreciate any feedback.

[Jeff]

For board designations, the examples I have seen show the designation as a separate balance in the unrestricted equity like you are mentioning. John's method of creating a sub-account under the asset has the added benefit of reinforcing that this money is set aside and should not be touched. Many see the money in the savings account and think it can be spent. By moving to a 'virtual' savings account it reinforces that this money has a designated use.

Before added multiple equity accounts and the release accounts, this is how many where handling donor restrictions as sub-accounts under the checking accounts.

[JohnDMeyers]

Thinking about your reserve income idea:

To put money into reserve:
CR Painting Reserve Income
DB Unreserved Income

If Painting Reserve Income closes to a sub-account of 01-3110-000, for example, this is kind of interesting.

It would work very similar to donor restrictions.

It would depend a little on whether you are in the habit of checking your equity section for the answer to "how much money do I have to spend?" or if you like looking in your checking/savings account balances for that information.

[ejsteffes]

Yes, this may be largely a matter of taste. I think my own preference is to look in the net assets section of the balance sheet for available money, since you already have to take into account the distinction between restricted and unrestricted net assets. I'd like to see the operating reserves listed near the donor restrictions. I found an article by the Nonprofit Reserves Workgroup showing a recommended breakdown of net assets, including operating reserves, at http://www.nccs2.org/wiki/images/5/50/W ... serves.pdf . See Figure 1 on p. 2.

[debbieg]

I hope it's OK to tag onto this thread. We have a similar situation to what you are asking but where the reserved money is not quite as specific.
A few years ago our church decided to make a line item in our budget that was called "Emergency Savings". A pre-determined percentage of each month's general offering would be set aside in this category. It would be used for some unforseen need at the church like a new furnace or roof. The money is actually transferred to our savings account on a periodic basis. I imagine the first transaction would be to credit the checking account and debit the expense account called "emergency savings". But then what would the transaction be to show actual movement of the money from checking to savings? All I have for savings is just the asset account. Do I need to set up other accounts? There can be other money in the savings account that came from somewhere else besides the emergency set aside (like interest or money from a closed CD that is temporarily stored there). When I looked at my savings account, how would I know how much money was the "emergency" set aside?
thanks,
Debbie

[Jeff]

Debbie,

A couple of questions about your current setup.

Do you budget an amount for this Emergency Savings?

The savings account where this money is transfered, does it also have amounts in it that are not part of the emergency savings?

[JohnDMeyers]

Debbie:

If the checking and savings are with the same bank (so that you don't need to write a check to do the transfer), then CR checking and DB savings.

To move the money back, reverse the CR and DB.

To spend the money (presumably, from checking), you will CR checking (after transferring the money back from savings) and DB expense.

To keep track of additional money in savings, I would use sub-accounts. I usually use the -000 as a Group account, and -001 and -002 as sub-accounts.

01-1060-000 SAVINGS (group, level 4)
01-1060-001 emergency savings (detail, level 6)
01-1060-002 other savings (detail, level 6)

[debbieg]

Debbie,

A couple of questions about your current setup.

Do you budget an amount for this Emergency Savings?

The savings account where this money is transfered, does it also have amounts in it that are not part of the emergency savings?

Jeff,
yes, I guess you could say it was budgeted. It is based as a percentage of the entire budget. For easy figures, let's say that our general budget comes to a total of $100,000. then there is an additional line item of $2,500 for "Emergency Savings" (2 1/2 %).
There was already some money in the savings account before we started doing this and of course, there is interest that is accumulated periodically.

[debbieg]

Debbie:

If the checking and savings are with the same bank (so that you don't need to write a check to do the transfer), then CR checking and DB savings.

To move the money back, reverse the CR and DB.

To spend the money (presumably, from checking), you will CR checking (after transferring the money back from savings) and DB expense.

To keep track of additional money in savings, I would use sub-accounts. I usually use the -000 as a Group account, and -001 and -002 as sub-accounts.

01-1060-000 SAVINGS (group, level 4)
01-1060-001 emergency savings (detail, level 6)
01-1060-002 other savings (detail, level 6)

John,
Yes, the accounts are with the same bank. I do a similar transaction between our regular checking account and a VISA (debit card) account. But that is just sliding money back and forth between 2 vehicles that are both spending against the same expense accounts...one just uses checks and the other a debit card.
but in this situation, when I xfer money to savings I also want to note somewhere that it was specifically for our emergency savings. At the end of any financial reporting period, I would want to show that in addition to salaries, utilities, missions, etc, that we set aside "X" amount of money for our emergency savings.
Or maybe all that would show up through the savings account transactions?? I have yet to get through the first month so I don't know what to expect from all the financial reports that might be produced.
That would also play into the second part of when we decide to spend some of that money. I hadn't really gone down that road yet. I suppose that when it comes time to use it, we would want to expense it against a logical budget category. For example, if we needed to replace the roof, would we xfer the money back to checking and credit the expense category of "building repair" and then write the check to go against that same category? I know I'm jumping ahead now, but I guess I should make sure that the method I use works in both directions.
debbie

[JohnDMeyers]

Here is an example of how I would do it.

Transfer money to emergency savings:
CR checking $5000
DB emergency savings $5000

Need comes up for roof: $2000
DB checking $2000
CR savings $2000

Pay for roof
CR checking $2000
DB roofing expense $2000

Then, I would run a balance sheet for the period when the money was originally in checking, and a balance sheet for the period ending when the money was in emergency savings, and one when it was back in checking (assuming these are all separate months). Otherwise, include an Account Activity report for the Emergency Savings account.

I would also show the Income and Expense report showing the expense for the roof.

[debbieg]

OK, John. Let me see if I am understanding this correctly. I would not need the expense acct that I currently have called "01-6540 Emergency Savings". Instead, I would add aditional levels to my current savings (asset) account and have something like:

01-1200-000 SAVINGS (level 3) (currently exists)
01-1210-000 MD Bank & Trust Savings (level 5) (currently exists)
01-1210-001 Emergency Savings set aside (level 6) (NEW)
01-1210-002 Interest (level 6) (NEW)
01-1210-003 Original CD xfer (level 6) (NEW)

Each month, I would have a transaction that moves the money from checking to savings as follows:

CR 01-1110-000 MD Bank & Trust Checking $500
DB 01-1210-001 Emergency Savings set aside $500

When a need comes up to spend the money, I would have 2 sets of transactions:

CR 01-1210-001 Emergency Savings $3,000
DB 01-1110-000 MD Bank & Trust Checking $3,000

CR 01-1110-000 MD Bank & Trust Checking $3,000
DB 01-5840-000 Repairs (outside) $3,000


The account activity reports will show the movement from checking to savings. Asset balances stay the same because the money didn't go anywhere.....it just resides in different accounts.

Am I on the right track?

[JohnDMeyers]

Debbie:

You are on the right track.

I see you indicated that your new accounts are level 6. If that is only because I used level 6 in my example, you may want to make them level 5 to stay consistent with your own convention.

The only new piece of information that I will throw into the mix is this. You can go into the Chart of Accounts and tell PowerChurch to include your asset accounts in the Cash Management report. You have to go to each account in the Chart of Accounts and include each one individually. I don't use this report on a regular basis, so I am not sure it will give you any useful information, but it may. When you run the report, uncheck the box about Accounts Payable open items. That definitely doesn't need to be on the report.

Otherwise, the account activity report will give you the information you are looking for.