Restricted funds Income-Expense reports

[sojorner]

Power Church on-line version 12, Windows 10
I know there is a lot of information you've provided on Donor Restricted Funds, but I'm still having some trouble "getting my head around" some of it.
I understand the process for setting up, contributing to and releasing Donor Restricted funds. My question really deals more with their use and the Income - expense report. The Income-Expense report includes both Funds releases and restricted fund release accounts. These two essentially net to zero. In thinking about this, it seems that the idea of a restricted fund is to "hold' that money in reserve until needed in accordance with the restrictions. When I do need to use that money, however, if I use an expense account to record the expenditure then it shows up in expense side of the income-expense report and negatively impacts the Net Income result. It seems to me that you would do the following when expending $100 from a restricted fund account:
CR: Checking account $100
DR: Fund's Release account $100
CR: Release from restriction account $100
DR: Unrestricted Fund account $100

The 2nd and 3rd transactions release the money from Restriction to unrestricted.
The 1st and 4th transaction are used to write the check - reduce the checking account BY $100 and the Unrestricted Fund balance by $100.
The Fund (equity) account is reduced by $100. But there is then no impact on the Balance sheet, nor the Income and Expense report which is what I think you'd want. Or am I thinking this all wrong?

[NeilZ]

In thinking about this, it seems that the idea of a restricted fund is to "hold' that money in reserve until needed in accordance with the restrictions. When I do need to use that money, however, if I use an expense account to record the expenditure then it shows up in expense side of the income-expense report and negatively impacts the Net Income result. It seems to me that you would do the following when expending $100 from a restricted fund account:
CR: Checking account $100
DR: Fund's Release account $100
CR: Release from restriction account $100
DR: Unrestricted Fund account $100

The 2nd and 3rd transactions release the money from Restriction to unrestricted.
The 1st and 4th transaction are used to write the check - reduce the checking account BY $100 and the Unrestricted Fund balance by $100.
The Fund (equity) account is reduced by $100. But there is then no impact on the Balance sheet, nor the Income and Expense report which is what I think you'd want. Or am I thinking this all wrong?

Where you do show the expense? Plus, since the checking account closes to the unrestricted fund balance you're basically deducting $200.00 from the unrestricted fund balance.

Where you're going wrong is thinking that it 'negatively' affects the "Net Income", that's more a business term used when you're looking to see a profit. Don't think in those terms, think in terms of assets, available funds. Assets are what you have after you pay your expenses, what you're thinking as 'net'.

Assets are the total of your liabilities and your equity/net assets/fund balance *.
* Those three items mean the same thing.

I'll use fund balance, as it avoids the use of 'net' completely, which may confuse the issue.

Income is income, whether its restricted or not. The only difference is that restricted is kept in a separate fund balance account. What the release restricted funds transaction does is MOVE the funds from the restricted fund balance, to the UNRESTRICTED fund balance. The amount in the checking account doesn't change, its been there from the time it was listed as income.

So a transaction to buy worship ministry supplies with restricted funds looks like this:

Code: Select all

CR  Checking             $100.00 - subtract $100 from checking 
DB  Worship Supplies      100.00 - add $100 to expenses (which reduces the unrestricted fund balance since this closes to that account)#
DB  Restricted Fund Rel   100.00 - subtract $100 from restricted fund balance
CR  Released from Restr.  100.00 - move $100 to unrestricted fund balance

# This 'reduction' in the fund balance happens behind the scenes there is no need to 'manually' adjust the fund balance to show expenses which is what you were trying to do.

The final two cancel each other out as this is not NEW income, this is the part that maintains the balance sheet correctly. Instead of showing up under the Restricted Net Assets (Fund Balance) header, these funds are moved to Unrestricted, thus the balance sheet amount on the equity/fund balance/net assets side doesn't change. You can do a test by running a balance sheet report note the total fund balance listed, then do a transaction that releases restricted funds, then run another balance sheet report and check the total fund balance amount. They stay the same, the only change will be an increase in unrestricted and decrease in restricted.

Even though the release lines are usually the last ones in a transaction, think of them as happening first.

Does this help at all?

[sojorner]

NeilZ,
Thank you for your response. I understand where you are coming from. I'm just having a little trouble wrapping my head around some of it.

I totally appreciate / value your comments and feedback on this topic, however, I think I need a source where I can study this in more depth to better understand it. Could you recommend a good source (book) to better understand the use of restricted funds from a transaction perspective and the impact on various report types? I think that would be better rather than going at it here one question at a time.

Thanks
Doug

[NeilZ]

NeilZ,
Thank you for your response. I understand where you are coming from. I'm just having a little trouble wrapping my head around some of it.

I totally appreciate / value your comments and feedback on this topic, however, I think I need a source where I can study this in more depth to better understand it. Could you recommend a good source (book) to better understand the use of restricted funds from a transaction perspective and the impact on various report types? I think that would be better rather than going at it here one question at a time.

Thanks
Doug

Doug

I learned by doing and trial and error, and seeing how the program works. Did you follow what I said about showing expenses? Where exactly are you having an issue?

[sojorner]

Neil, you are correct in that I am thinking in terms of the business term "net" income. However, I am also looking at this in terms of the income / expense report. For example, if I received $1000 this fiscal year for a restricted Fun, say Youth Peace garden, it would be recorded as restricted income. Then this would show up under the Income listing for this fiscal year. If you only looked at the "Excess / (Deficit) it could put a near zero, slight deficit into a positive 'net'. Conversely, if I then spend that money on some supplies next fiscal year, it would add to the expense listing. If I am again just at a 'zero balance, slight excess, it could push the 'net' to a deficit. Although I understand what is going on, most folks will see the Excess (income year), Deficit (spending year), and then the confusion begin. If I set it up in a separate accounting fund, then it is more obvious to folks what is going on. However, when you multiple fund accounts in the same fund account, it starts blur and the reports become confusing to non-accountants. Now let's say you have 10 of these restricted donor funds and do the same thing - money comes in one year and is spent the following year or two......
I also understand the disadvantage of creating multiple accounting funds.
I also understand how the Balance statements do not show a 'net' for the funds. However, you do not have the option to show / compare multiple years / months! (On side note, I've always seen Balance sheets to show a final "net / difference", i.e.: "Assets -Liabilities + Funds= xx.xx". That way you see the accounting is in balance without having to calculate it yourself! You don't seem to do that.).
My ultimate goal is get the financial accounting system set up so that the next person, who has little to no accounting understanding / background can still manage our finances using the reports and information available from PwrChrch without the need to create excel spreadsheet reports. We do use an accountant to do the data entries, but she is limited in her understanding of Fund Accounting. I have a few folks that have 'For-Profit-Accounting / Bookkeeping" backgrounds and they just don't understand fund accounting on a cash basis!! So the issue then is I'm looking for a text book but not a deep text book to give me some good basis fo fund accounting and donor restricted funds. I understand the concepts in PowerChurch that we have been talking about on a practical / accounting mechanical / journal entry basis, but not enough to "teach and have a discourse on it".

I learned Fund accounting back in the mid -90's when I first treasurer here at this church. I purchased several books and spent two years studying them. Back then the set up was to use different "accounting funds", and where applicable, transfer monies between them. In that instance, the income / expense to these accounts were more direct and thus understandable. In that design, you could have several main accounting funds, as well as 'sub-funds', each having their own income / expense accts. Thus restricted / donor accounts were established by definition, but not processed as you do them today - i.e. via release accts.

[NeilZ]

I do understand your issues.

May I suggest that you look at the video training offered by Powerchurch here on the site. The series 'Intro to Accounting' goes over the principles used by Powerchurch, and may give you and your staff/volunteers a better idea of the differences between business or accrual accounting, and fund accounting.

The other accounting training videos are very extensive, and go into all aspects of the program.

[Matt]

I would also highly recommend that you read the "Accounting For Contributions" document located at

https://www.powerchurch.com/support/59/ ... tributions

Based on your concerns, I think it would help if you set up two Accounting Funds--one for your General Fund and one for your restrictions. You could then run the Income and Expense Statement separately for each fund in order to analyze profit and loss. It makes sense to look at profit or loss for the General Fund for a fiscal year, as income received this fiscal year is generally spent this fiscal year. It doesn't make as much sense to look at profit or loss for your restrictions for a fiscal year, as income received this fiscal year may not be spent until a future fiscal year. The key with your restrictions is to make sure the fund balance shown in the equity section of the Balance Sheet stays positive for that restriction, meaning that you have not spent more for that restriction than has come in.

[sojorner]

Matt,
Thanks for your reply. Appreciate all the feedback and support. You folks are trupy great when it comes to support. Thank you very very much!!