Accounting for Board Restricted Funds

[Kevin Sawatzky]

Would anyone know what the proper way is to account for funds that the Board restricts. For example, every year we budget $3,000 for Worship Equipment. The Board has decided that any money that is not spent in that year from the Worship Equipment budget is moved to a Worship Equipment Restricted Fund so that it is carried over to the next year. The idea is that we will accumulate money in this fund each year so that when a major purchase needs to be made we will have the funds for it.

We currently move any unspent funds from the Worship Equipment Budget at the end of the year to a restricted liability account. However, in reading articles on Donor Restricted Funds, it would seem like this is more of a restricted equity fund. Is it as simple as creating a Restricted Equity Account called "Worship Equipment Fund" and move the money into that account at the end of the year?

If so, the only problem I foresee is if a major purchase needs to be made and there isn't enough funds in the restricted equity fund and the Board makes the decision to allow donations to be made to help make the purchase. Now I have to set up Donor Restriction Accounts and I would have 2 sets of Equity Restricted Accounts on the Balance Sheet called Worship Equipment Fund. One under Donor Restrictions and another under Board Restrictions.

Thoughts?

[JohnDMeyers]

Because this is not a "donor restriction", I handle this in a different manner.

I create sub-accounts under checking and move the "internally restricted" money into sub-accounts.

[NeilZ]

Yes, but John this is a 'board restriction' ... I'm assuming they want the money to be kept out of the general fund balance, which is why I've created a 'donor' restriction on such things such as money put aside for start up costs on our annual apple dumpling sale.

Its in the checking account, but it is not available for access to pay general operating bills. When you use it, it has to be 'released' which then appears in the accounting reports which are sent to our Session (board).

[Matt]

To help determine how to answer your question I need to know what account you debit when you move the unspent funds to a restricted liability account at the end of the year. Please provide the account number and name.

[Jeff]

The technically correct accounting way would be to create a board designated account in the unrestricted section of the equity accounts. This is in the unrestricted equity area because only donors can restrict money. At the end of the year to move the the "left over" money you would debit the unrestricted equity account and credit the board designated account.

One of the areas that needs to be considered before you do this is how is the board expecting this to show with regard to budgets? Are they expecting this designation to show on this year's budget?

[Kevin Sawatzky]

To answer Matt's question, we currently debit the expense account and credit the liability account when we move the funds over. So in my example we debit "Worship Equipment" expense account.

Jeff, did you mean to say you would CREDIT the unrestricted equity account instead of debit. And when you mention hitting the board designated account for the other half of the transaction are you referring to an expense account?

I'm not completely clear about your question re: how the board expects this designation to show on this year's budget. But I'll try to explain how we operate. Because the church basically wants to see financial statements on a cash flow basis (i.e. how much has come in and how much of that did we spend) the board budgets on the expense side what they want to put into restricted accounts at year end. Then at the end of the year we transfer the amount from the expense to the restricted account. Does that help?

[Jeff]

Jeff, did you mean to say you would CREDIT the unrestricted equity account instead of debit. And when you mention hitting the board designated account for the other half of the transaction are you referring to an expense account?

In this scenario you are basically moving amounts from total unrestricted equity to a board restricted equity account. So you would be reducing total unrestricted equity (debit) and increasing the board restricted equity account (credit).

The board restricted equity account is in the unrestricted equity section. It would be there to show that the board has set aside money for a future purpose. Like donor restricted equity accounts show that money is set aside for donor restricted purposes. The board restricted account is in the unrestricted section, because the board can lift the restriction at any time.

There would not be any expense accounts used in this transaction, you are just reclassifying equity.

the board budgets on the expense side what they want to put into restricted accounts at year end. Then at the end of the year we transfer the amount from the expense to the restricted account. Does that help?

This is really the problem with this method. With using this method, the amount left over is not expensed and would then not show up on the budget.

Matt, do you have any suggestions?

[Matt]

Kevin,

Thank you for letting me know what type of account you were debiting. I suspected it was an expense account but wanted to be sure before I answered your question.

Here are my thoughts on how to do this. I am a fan of full disclosure on the financial statements. The problem with doing accounting entries directly to the equity accounts is that these do not show up on the Income and Expense Statement. To make sure I am understanding your situation correctly let's paint a scenario.

Let's say the annual budget for Worship Equipment is $3,000, but only $2,500 is actually spent. From what I am understanding, you want the Worship Equipment account to show $3,000 of expense for the year and then transfer the $500 that wasn't actually spent to a board restricted equity account. That being the case, I would recommend that you set up an expense account called something like "Worship Equipment-Set Aside". Set up the account right underneath the Worship Equipment expense account. Set the close to account to close into the board restricted equity account. Then, at the end of the year you would record the following entry:

Debit Worship Equipment Expense $500
Credit Worship Equipment - Set Aside $500

If you do the accounting this way, the $500 credit will close into the board restricted equity account and be available for future use. The Income and Expense Statement will also show full disclosure of the $3,000 spent in the Worship Equipment account, along with the $500 credit in the Worship Equipment-Set Aside account. This way, people reading the Income and Expense Statement will clearly see that there was $500 of funds left in the Worship Equipment account and that this $500 was transferred to the Worship Equipment-Set Aside account.

Then finally, let's say next year you budget $3,000 again, but a major Worship Equipment purchase was made for $3,500. Assume the extra $500 would be paid out of the Worship Equipment-Set Aside account. The accounting entry you would make when paying for the equipment would be as follows:

Debit Worship Equipment $3,000
Debit Worship Equipment-Set Aside $500
Credit Checking Account $3,500

Once again, you would have full disclosure of what was done on the Income and Expense Statement. The $500 debit to the Worship Equipment-Set Aside account would close into the board restricted equity account, reducing it to zero.

Does this help?

[Kevin Sawatzky]

Matt, that is very helpful, thanks a lot.