Using Restricted funds - part 2

[debbieg]

I hope it's OK to start this as a new topic. the first one was getting rather lengthy and was also tagged on by a different question of sorts. Plus, a few things are clearer in my mind now and I want to approach this a different way.

After much reading and talking to Tech Support, I realize that the major piece I am missing is expense accounts to use when restricted funds are spent. My previous example with the Agape fund was unique because that is one area that has money in a restricted fund as well as a budgeted amount in the general fund. All of our other restricted funds have no budgeted counter part. So, as an example, if money is contributed to the Deacon Benevolent fund, I understand that I credit the Deacon Ben. Income acct (4215) and debit the checking acct (1110).
then when I spend it, I do the release and have a debit to the Deacon Ben. Release acct (4815) and a credit to the "Release from Restrictions(4999). It was the last step that was throwing me. The example in the manual describes using restricted money to buy choir robes. But instead of showing an expense for buying them, it shows a transaction that debits an asset account. Most of our spending of restricted funds would not involve creating a new asset, they would be expenses. My confusion was in not understanding the relationship between the income/equity and release accounts. I guess I thought that when i spent money, I would just see it coming out of one of those accounts directly.
So now I will go set up expsnse accounts for each of my restricted funds and I should be ready to roll.

thanks for all who answered in my previous post and tried to clear up my muddled thinking.

My only question left is not actually confined to the realm of restricted funds but of assets in general. I think I will post that separately just to keep things clear.
Debbie

[JohnDMeyers]

Debbie:

It sounds like you have a good understanding of the restriction / release process.

I will try to address the question about the asset vs. expense aspect of the example.

There is also an example of flowers, I believe, in which the flowers are setup as an expense, not an asset.

When you spend the money, you credit your checking account. Then, you debit either an asset or expense account depending on whether or not the item you are buying is an asset. (how's that for an attempt at explaining it?)

You can't make an asset out of flowers (they wilt too fast), so you use an expense account for flowers.

You keep choir robes for years, so you use an asset account for robes.

Somethings are not as black and white, and you have to ask your board or an accountant for clarification.

[debbieg]

Thanks John. You actually got into what I was going to ask about asset vs. expense. I can see the distinction but in reality it seems it could be confusing in the financial reports. Forget restricted funds for a minute....let's just talk general funds with budgeted expense accounts. What if choir robes were just something that came out of the regular Music Ministry expense account? If I debit it as an asset, how would I show that it came out of Music Ministry's budget? Or we just recently bought a new vacuum cleaner. I was planning on debiting the building maintenance expense account. But it is an asset that we now have. How can you possibly show both?
Debbie

[JohnDMeyers]

Debbie:

If my explanations don't seem conventional, it's because I teach math, and I don't speak accountanease.

The age-old problem with calling something an asset, is that it is an EXPENSE because you have to buy it to make it an asset. But it is not an EXPENSE in the accounting-sense because it is an ASSET. I didn't come up with the system, and I think it is illogical.

The way that accountants make an asset into an expense is to depreciate it.

So, your vacuum cleaner becomes an EXPENSE over a period of time. Each item has an accountant-approved time, over which, you can depreciate it, until the asset is worth zero, and has totally been EXPENSED.

Let's say that your vacuum cleaner costs $500 and the accountant-approved depreciation on it is 5 years. That's $100 per year that you will show in your depreciation (along with cumulative total of everything that you are depreciating), but let's say you only have one item, the vacuum cleaner.

You will need these accounts (which shows why Accountants have job security):
01-1110-000 checking
01-1710-000 FURNITURE AND EQUIPMENT (Group) level 4
01-1720-000 vacuum cleaner (detail) level 6
01-1910-000 accumulated depreciation
01-5890-000 depreciation expense

When you buy the vacuum cleaner:
CR 01-1110-000 checking $500.00
DB 01-1720-000 vacuum cleaner $500.00
CR 01-1910-000 accumulated depreciation $100.00 (this will show a negative on your balance sheet)
DB 01-5890-000 depreciation expense $100.00

Next year (and 3 subsequent years) you will show this:
CR 01-1910-000 accumulated depreciation $100.00
DB 01-5890-000 depreciation expense $100.00

On year six, you will buy another vacuum cleaner and you will have to get rid of the $500.00 asset in 01-1720-000 like this:
CR 01-1720-000 $500
DB 01-1910-000 $500

You "zero-out" the asset when it is fully depreciated and you "reset" the accumulated depreciation because you are no longer counting that asset in the list of depreciated items. (these are definitely NOT accounting terms)

In reality, your depreciation entry could be $1000s or $10,000s or more every year, and you have to keep track of items that you add during the year and items you retire over the year.

Note: The entry in 01-5890-000 depreciation expense is a NON-CASH expense. You really didn't spend $100.00 this year (you spent $500.00), and next year (you spent $0.00 but show $100.00, etc.).

When you show your SOURCES AND USES OF CASH each year, you have to:
-subtract any assets you purchased
-add back in depreciation expense
-subtract mortgage principle paid
-etc.

[debbieg]

No wonder i understand you.....I majored in math. I took one accounting course because i had to and i hated it. Now I remember why.

Your explanation does make sense. I have my own business and have seen the depreciation stuff on my taxes (not that I understood it). I think I will ignore the whole "asset" thing unless we purchase something very major. As a non-profit entity, our assets (other than $ in the bank) are not a critical piece for us.
thanks for your help and explanations.
Debbie