Why Your Net Income is Different Than Change in Cash

You just got your numbers back from last month and you see that the church “made” $5,000. However, you notice the cash balance is $10,000 less than last month. How can this be? Let’s take a look at the 3 main factors for churches.

Asset Purchase

Unless your church has a different policy, the IRS regulates that purchases of $2,500 or more are to be classified as assets. Meaning they would not show up on your Statement of Activities (Profit and Loss) but rather your Statement of Financial Position (Balance Sheet). Below is an example:

You purchase $5,000 in new sound equipment at the end of the month. That amount goes directly to your “Assets” on your Statement of Financial Position meaning it would not show up underneath “Expenses” in your Statement of Activities. Rather that $5,000 would be depreciated over the next 7 years.

Fallout for the month of purchase:

• Cash decreases by $5,000
• Expenses remain unchanged for that month
• Net Income would show as $5,000 higher

Liability Payments

Let’s look at the two most common examples, loan and credit card payment, to see how this could positively and negatively affect your Net Income.

Example 1

The church makes a monthly $2,000 repayment. For the particular month $1,500 goes towards the principal and $500 goes towards interest. The $1,500 would reduce the Liability on the Statement of Financial Position and only the $500 would be shown as an expense. Why? Because $1,500 is repaying money you never had in the first place and $500 is your expense to borrow the money.

Fallout for the month:

• Cash decreases by $2,000
• Expenses increase by only $500 for the month
• Net Income shows as $1,500 higher

Example 2

The church’s credit card payment is due on the 15th of the month. The church had a bill of $2,500 the previous month and pays that amount on the 15th. The current month sees more credit card spending, $5,000 to be exact. The $2,500 would reduce the Liability on the Statement of Financial Position while the $5,000 would show up as expenses for the current month.

Fallout for the month:

• Cash decreases by $2,500
• Expenses increase by $5,000
• Net Income shows as $2,500 lower

Donations In-Transit

A church never fully realizes all the donations they receive for a current month in the current month. Giving softwares can deposit donations up to 7-days after they were made. Checks can also have a lag time from the time they were given until deposited in the bank. Churches follow accrual accounting meaning the income is realized when it happens as opposed to when the church actually sees that money in their bank account. Lets take a look at the most common example of a big difference.

It’s the end of the year and you have quite a few donors make large donations totaling $25,000 on the 31st of December. However, that money does not make it to the churches bank account until the the 7th of January.

Fallout for the month:

• Cash remains unchanged
• Income increases by $25,000
• Net Income shows as $25,000 higher

Summary

Rest assured that in most cases nobody is stealing from you. At Guided Insight we make sure you easily understand the totality of your finances and we would shed light on any fraudulent activities.