Today, we’ll take a look at some of the adjusting entries that are common in church accounting. Last time we talked about the trial balance.
After seeing that all your debits and credits balance in the trial balance, you’re probably eager to take those numbers and create the financial reports. However, you still may need to make some adjustments to the numbers before posting.
How Do I Know if I Need to Make Adjusting Entries?
If you’re going to be audited by a third party organization, then chances are you’ll need to make a couple adjusting entries. There are two principles (rules) of accounting that make these adjusting entries necessary:
(1). The Realization Principle (for Revenue Recognition)
This principle states that all revenues should be recognized or recorded during the period that they are earned. For example, let’s pretend that your church is holding a fundraising dinner on January 10th of the next year 20X2. The current date is December 30th 20X1. You’ve already sold 100 tickets at $10 each and recorded $1,000 worth of revenue for this year. Technically this revenue shouldn’t be recorded until the next year when it is actually earned (to earn the revenue you must actually have the fundraiser dinner).
We’ll pretend your bookkeeper accidently made this journal entry in December. He debited cash for $1,000 to show an increase in the cash asset. He also credited “Fundraiser Revenue” to show an increase in revenue.
At the end of the year your accountant realizes that an adjustment needs to be made. Here’s what the adjusting entry would look like:
You’re getting rid of the fundraiser revenue (by debiting the account) and specifying that it’s actually unearned revenue. Note that unearned revenue is a liability (you owe that fundraising dinner to the people). You increase a liability by crediting the account.
Next year after the fundraiser has been performed, you can recognize the revenue.
You’ll debit the liability to get rid of it and credit the revenue to recognize it.
(2). The Matching Principle for Expenses
The matching principle matches all expenses with related revenues in the same period. The idea is to record all expenses in the proper time period. For example, let’s pretend that your church pays its staff $4,000 every two weeks. As of December 31, 20X1 your staff has worked one week of the two week work period. Usually you don’t record the expense until the cash actually leaves your church. However, according to the matching principle you should record one week’s worth of employee expenses during this period. Half of $4,000 is $2,000. Your church has accrued $2,000 worth of expenses that should be reported.
You’re recording wage expense during the time period that the expense occurred.
Common Adjusting Entries
Below are the four common types of adjusting entries.
- Accrued Expenses (ie. Expenses that have been incurred but haven’t been recorded)
- Unearned Revenues (ie. Revenues that haven’t been earned but have been recorded)
- Prepaid Expenses (ie. Expenses that will happen next year that you’ve already paid for)
- Depreciation (ie. Physical assets that require a depreciation expense each year )
I don’t want to get bogged down in adjusting entries in this introduction to church accounting. Most of the time these adjusting entries are done by a full-fledged accountant, but if you want to know more about them, let me know and I’d be happy to help.
Post Adjustment Trial Balance
You may have noticed that the Church Accounting Cycle of Doom has “Trial Balance” listed twice.
Making an adjusting entry will change your ledger accounts. This means you’ll need to update your trial balance. If you’re doing this manually then you’ll need to take your new ledger balances and copy them over to the new trial balance. This updated trial balance is known as the post adjustment trial balance.
This is really a brief step, but it’s worth mentioning so you can understand the process. Keep in mind that accounting software will automatically generate your post adjustment trial balance for you.
Conclusion
Today we learned a little about adjusting entries. Sometimes at the end of the year you have to make these entries to ensure that all revenues and expenses are recorded in the proper accounting year. After you make these entries, you post the new account balances to the post-adjustment trial balance. This trial balance is the one you will use to create your financial statements and reports (we’ll discuss these reports in some detail in a few lessons).
Before we cover the financial statements and reports, we need to finally tackle the tough issue of fund accounting. We’ll do that in the next lesson.