Introduction

The purpose of web presence is to provide assistance and guidance to pastors of small parishes, with limited staffs.  This assistance is also designed to assist finance councils and bookkeepers, especially those with limited staff.  The emphasis is on protecting the assets of the church and avoiding being taken advantage of or having to pay penalties. Internal controls are emphasized so that issues can be avoided.  I have witnessed inexperienced bookkeepers and pastor’s struggle through various situations.  Their backgrounds sometime limit their understanding of various solutions.

My prayer is to be able to provide some training and advice from what I have learned and observed over the years as an internal auditor.  You will be given the opportunity to gain a better understanding of business concepts and areas to avoid reducing the risk of loss.  The web page begins with an overview of accounting.

• Be assured that the purpose of these articles is to assist in the administrative activities of the parish. This means that the writing will be understandable and clear.  We are also open to providing an undated publication to include suggested topic or where .  Please email me for comments or suggestions on what to include in future additions.  Use the web page or email us at principal@Quillotherm.com.

• I have the unique view of a Certified Internal Auditor (CIA), who holds both BS and MBA degrees and who was the director of internal audit at a very large archdiocese for about 10 years.   In addition, I was an auditor with a fortune 100 company.  My education, credentials and experience should provide a very effective base for providing observations, suggestions and comments to assist in the ministry of all who are responsible for the assets of the church.

Chapter One

Overview of Accounting

Pope Francis said that the "pursuit of truth" was important,

"Not for the sake of opening old wounds,

But rather as a necessary means of promoting justice, healing and unity".

Some beginning courses in bookkeeping or accounting begin with an explanation of the Balance Sheet or a discussion of the Accounting equation (Assets = Liabilities + Net Assets/Owners’ Equity). This approach although typical, forces one to attend every class session and try to put the pieces together without really understanding the big picture.

At the end of the course things, begin to make sense because you are usually required to make all daily, monthly accounting entries and produce the financial statements.

We present a somewhat different approach since the model presented separates the accounting activities into three categories (input, process and output).

Throughout you will observe the term Net Asset/Owners’ Equity. These terms represent the difference between assets and liabilities.  In the non-profit world net assets represents this difference, while the for-profit world uses owners’ equity.

The Accounting Cycle

In order to begin our expiation and to simplify, think of money as the transaction and the driver of the accounting system from receiving it, spending it, recording it and finally showing what was received and where it is or where it went.   A transaction is the beginning of the accounting cycle.

Let us refer to Figure 1, to explain the process.

The Accounting Cycle

Figure 1

Notice figure 1 portrays the accounting activities that occur during the month with the results being the financial statements.

A.  INPUT

In our model, INPUT is the word that identifies transactions (money coming in and of money going out).  As mentioned previously, consider the word “transaction” as the movement of money.  This over-simplification should facilitate a better understanding of the accounting input.

B.  PROCESS

The PROCESS begins when these TRANSACTIONS occur and are recorded in the:

(1) JOURNAL (Book of Original Entry) - The JOURNAL is used as the source document for posting to the:

(2) LEDGER (Book of Final Entry).  (The LEDGER is organized by ACCOUNT where related TRANSACTIONS are summarized.

(3) The TRIAL BALANCE is produced from the JOURNAL.  The TRIAL BALANCE shows the account balances with debit and credits.  The debits must equal the credits and checking these balances assists in identifying any issues that require examination.  Debits and Credits will be explained in future articles.

(4) The TRIAL BALANCE WORKSHEET is prepared using the TRIAL BALANCE and adding two columns to capture revenue and expenses so that the temporary accounts can be identified and used to prepare the P&L and the BALANCE SHEET.  We will discuss temporary accounts (revenue & expense) in a future chapter.

C.  OUTPUT

We therefore now know that the main products of all the monthly accounting activity is to produce a sources and uses of funds statement also known as a PROFIT and LOSS STATEMENT and an updated BALANCE SHEET.  These statements provide a basis for analyzing the financial condition of the entity.  A future article will describe the financial statements.

SUMMARY

This introduction to the accounting cycle, while oversimplified, does present the key components, which will be further explained in future, articles.  Transactions are recorded as they occur in a JOURNAL.  This JOURNAL is used as input for posting to a LEDGER, which classifies transactions into groups of similar transactions.  The TRIAL BALANCE is then produced to validate information, serve as the basis for preparing financial statements and closing the temporary accounts to zero balances for the start of the next period.

Temporary accounts are set up to record revenues and expenses and those accounts are cleared out at the end of an accounting period (usually one month).  Since revenues and expenses are temporary accounts under Net Assets/Owners Equity.  Temporary accounts will be discussed in a future chapter.