Basic Accounting Terms
Accounting is the art of analyzing, recording, summarizing, reporting, reviewing, and interpreting financial information.
Bookkeeping is the process of recording and classifying financial transactions (activities). In simple language-maintaining the records of the financial activities of the church. Bookkeeping's objective is simply to record and summarize financial transactions into a usable form that provides financial information. It is one of the components of accounting.
Accrual Method of Accounting
All churches are to use the Accrual Method of accounting. This method records:
The general ledger is the core of the financial records. These constitute the central “books” of the system, and every transaction flows through the general ledger. These records remain as a permanent track of the history of all financial transactions since day one of operations.
All accounting transactions are recorded through journal entries that show account names, amounts, and whether those accounts are recorded in debit or credit side of accounts.
An Account is a separate record for each type of asset, liability, equity, revenue, and expense used to show the beginning balance and to record the increases and decreases for a period and the resulting ending balance at the end of a period.
You should be aware that All Accounts:
The Normal Balance is the debit or credit balance that an account is expected to have.
The normal balance is also the side of the account that increases the balance of the account. Since the increase side of assets and expense accounts is the left (debit) side these accounts normally have a debit balance. Likewise, since the increase side of liabilities, revenue, and owner's equity accounts is the right (credit) side these accounts normally have a credit balance. In other words, since debits increase assets and expense accounts, they normally have a debit (left side balance). Conversely, because credits increase liability, equity, and revenue accounts, they normally have a credit (right side) balance.
Comment: An account can occasionally end up with a balance that is not its normal balance. A good example would be when the bank ends up with a credit balance. This credit balance signifies that the account is overdrawn, and instead of being classified as an asset, which it normally is, is now a temporary liability (amount owed to bank).
Normal Account Balance
Just knowing the normal balances for the types of accounts makes it much easier to determine when to use debits and credits.
Debits and Credits
A debit increases an asset while a credit decreases an asset.
A debit decreases a liability while a credit increases a liability.
A debit decreases owner's equity while a credit increases owner's equity.
A debit decreases revenue while a credit increases revenue.
A debit increases an expense while a credit decreases an expense.
The Trial Balance, which can be taken at any point in time, lists all ledger accounts and their balances and is used to prove the equality of debits and credits. Assets are listed first followed by liabilities and then owner's equity. Debit balances are listed in the left column and credit balances in the right column.The trial balance proves that the accounts balance, but it does ensure that all transactions were entered or entered into the proper accounts.
A balance sheet is a snapshot of a church’s financial condition at a specific moment in time, usually at the close of an accounting period. A balance sheet comprises assets, liabilities, and owners’ equity. Assets and liabilities are divided into short- and long-term obligations including cash accounts. At any given time, assets must equal liabilities plus owners’ equity. An asset is anything the church owns that has monetary value. Liabilities are the claims of creditors against the assets of the business.
What is a balance sheet used for?
A balance sheet helps the church quickly get a handle on the financial strength. Is the church in a position to expand? Can the church easily handle the normal financial ebbs and flows of revenues and expenses?
Balance sheets can identify and analyze trends, particularly in the area of cash flows and payables.
Balance sheets, along with income statements, are the most basic elements in providing financial reporting to potential lenders such as banks, investors, and vendors who are considering how much credit to grant.
Assets are subdivided into current and long-term assets to reflect the ease of liquidating each asset. Cash, for obvious reasons, is considered the most liquid of all assets. Long-term assets, such as real estate or machinery, are less likely to sell overnight or have the capability of being quickly converted into a current asset such as cash.
2. Current assets
Current assets are any assets that can be easily converted into cash within one calendar year. Examples of current assets would be checking or money market accounts, accounts receivable, and notes receivable that are due within one year’s time.
Cash:Money available immediately, such as in checking accounts, is the most liquid of all short-term assets.
3. Fixed assets
Fixed assets include buildings, inventory and vehicles that are used in connection with the church.
4. Total assets
This figure represents the total dollar value of both the short-term and long-term assets of the church.
5. Liabilities and owners’ equity
This includes all debts and obligations owed by the church to CIBC, national office,and vendors, plus the owners’ equity. Often, this side of the balance sheet is simply referred to as “Liabilities.”
6. Total liabilities and owners’ equity
This comprises all debts and monies that are owed to outside creditors, vendors, or banks and the remaining monies that are retained earnings of the church.
Click here to An income statement, otherwise known as a profit and loss statement, is a summary of a church’s profit or loss during any one given period of time, such as a month, three months, or one year. The income statement records all revenues for a given period, as well as the operating expenses for the church.
What are income statements used for?
You use an income statement to track revenues and expenses so that you can determine the operating performance over a period of time. Church’s use these statements to find out what areas are over budget or under budget.
Income statements, along with balance sheets, are the most basic elements required by potential lenders, such as banks, investors, and vendors. They will use the financial reporting contained therein to determine credit limits.
Represents the amount of revenue generated by the church. There are receipted and non-receipted income sources.
2. Total Income
The amount recorded is the total of receipted and non-receipted income.
3. Operating expenses
These are the daily expenses incurred in the operation of the church. They are divided into categories based on the reporting requirements of the T3010.
4. Total expenses
This is a tabulation of all expenses incurred in operating the church.
5. Net income
This is the amount of income in excess or (deficit) over expenses. This amount increases or decreases the Retained Earnings amount of the church.