Fin.I.C.page 1 Accounting Basics This Accounting Basics summary is being provided to: 1. Explain some of the basic accounting concepts. 2. Provide you with a resource to help you handle daily transactions as well as unusual situations that may arise. 3. Provide examples of journal entries for transactions that are often inquired about. 4. Provide instructions for preparing bank reconciliations and a form to use for this purpose. If you have any questions, please feel free to contact St. Ambrose Financial Services, Inc. We are able to provide assistance to any parish bookkeeper with accounting problems or concerns. General Accounting Review A brief review of some basic accounting concepts and theories is presented for informational purposes. You don t need mastery of these concepts to do the bookkeeping for your parish but a brief review will help to enhance understanding of the accounting process. Account Classifications 1. Assets All items of value held by the parish are considered assets. Assets include cash, investments, receivables, land and buildings.
Fin.I.C.page 2 It is important to distinguish assets as unrestricted, restricted and designated. Unrestricted assets are available for the general use of the parish ie the parish checking account. Restricted assets are limited in purpose by the donor and the parish is legally obligated to spend restricted assets only for the specified purpose ie money designated for a building project. Designated assets are assets that have been set aside by the parish for a specific purpose. However, parishes may not designate assets to an endowment fund unless the donor designates the funds as such. 2. Liabilities All debts of the parish are liabilities. Liabilities include accounts payable, payroll taxes, unpaid Diocesan special collections and loans payable. Liabilities are classified as current or long-term. Current liabilities are due in one year or less. Longterm liabilities are due in over one year. 3. Fund Balance The fund balance simply reflects the net worth of a parish. It is the difference left when total liabilities are subtracted from total assets. 4. Revenues Revenues are monies earned or accrued during an accounting period. Revenues come from sources such as offertory collections, gifts, fundraisers and interest on investments. 5. Expenses Expenses are the costs associated with carrying out the ministries of the parish. Expenses are such items as
Fin.I.C.page 3 salaries and benefits, building and grounds maintenance and the cost of liturgical supplies. The relationship between the first three categories is expressed by the accounting equation: Receivables and Payables Assets = Liabilities + Fund Balance A receivable is an asset account that represents cash the parish will be receiving at some point in the future. When the parish receives money for the debt the receivable is reduced. When all of the money is received the balance of the receivable account should be zero. A parish should only have a receivable when another parish shares a priest and the other parish is paying a portion of the pastor s expenses. A payable is a liability account that represents an amount the parish owes another party. When the amount is repaid the liability is reduced. When all of the debt is paid the balance of the payable account should be zero. Debits & Credits Effects of debits and credits on each of the five account classifications are displayed below by the use of T accounts. Debits are always on the left while credits are always on the right. If the total of the transactions on the debit (left) side is higher than on the credit (right) side the account has a debit balance. If the credit side is higher the account has a credit balance. Notice in the examples below how debits and credits affect the various categories differently.
Fin.I.C.page 4 Account Name Debit Side Credit Side Assets Liabilities Debit Increase (+) Credit Decrease (-) Debit Decrease (-) Credit Increase (+) Normal Balance Normal Balance Fund Balance Debit Decrease (-) Credit Increase (+) Normal Balance Revenues Expenses Debit Decrease (-) Credit Increase (+) Debit Increase (+) Credit Decrease (-) Normal Balance Normal Balance
Fin.I.C.page 5 To understand the use of debits and credits refer back to the accounting equation: assets = liabilities + fund balance. Accounts on the left side of the equation (assets) normally have debit balances. Accounts on the right side of the equation (liabilities and fund balance) normally have credit balances. Revenue accounts increase the total fund balance so they normally have credit balances whereas expense accounts decrease the total fund balance so they normally have debit balances. Debits must always equal credits. When recording transactions you may refer to the T accounts to help you decide whether a debit or credit is needed to the account. To increase an asset or expense account you must debit the account ie paying the office supply bill increases the office supplies expense account so this would result in a debit to that account. To decrease an account with a debit balance you must credit the account ie paying the utility bill decreases the cash account so this would result in a credit to that account. The reverse is true for accounts that normally have credit balances; liabilities, fund balance accounts and revenues. Hint: The best place to start when deciding what to debit or credit is to look at the cash account since most entries will involve cash in some way. Since cash is an asset account the normal balance is a debit balance. To increase cash a debit is made and to decrease cash a credit is made. Once you have established whether a debit or credit is needed to the cash account the other half of the entry needs to be made to balance the accounting equation. Here are some examples: Money is received from a mass collection. Cash is increased so a debit is made to the cash account since it is an asset account. In order to balance the accounting equation an equal credit amount is needed. The collection accounts (adult envelopes, youth envelopes, offertory plate, etc.) would be credited. The
Fin.I.C.page 6 total of the credits must equal the debit made to the cash account. A check is written to pay the telephone bill. Cash is decreased so a credit is made to the cash account since it is an asset account. To balance the transaction a debit is needed and that debit would be to telephone expense. Money is received from another parish for shared expenses. Cash is received so a debit is made to the cash account. The amount owed by the other parish is recorded on the parish books as a receivable which is an asset account. Since this account is being decreased (less money is now owed by the other parish) a credit is made to the receivable account. The parish borrows money from St. Ambrose Financial Services, Inc. Cash is received so a debit is made to the cash account. The amount owed to St. Ambrose Financial Services, Inc. is a liability. The liability is being increased so a credit is made to the parish notes payable principal St. Ambrose Financial Services, Inc. loan account. The parish pays back a portion of the above mentioned outstanding debt to St. Ambrose Financial Services, Inc. along with interest. Cash is being paid out so the cash account is credited. The amount owed by the parish is decreased so the parish notes payable principal St. Ambrose Financial Services, Inc. loan account is debited for the amount of principle being paid. The amount of interest expense is increased so this account is also debited for the amount of interest being paid. The total of the two debit amounts must equal the total of the credit to the cash account.
Fin.I.C.page 7 Determining Which Account to Use It is difficult at times to determine which account number should be used for a particular transaction. Each parish should have a Parish Chart of Accounts which can be found at: http://www.stambrosefinancial.com/files/pfm/i.%20annual%20re port/fin.i.b.page%201-20.pdf When there is difficulty in determining which account number to use, it may be helpful to refer to the chart of accounts as it details what each account number is to be used for and how it relates to reporting on the Annual Report. Once you have reviewed the descriptions if there is still a question contact St. Ambrose Financial Services, Inc. to assist in finding the most accurate account number to use. Journal Entry Examples 1. Recording interest on deposits held by St. Ambrose Financial Services, Inc. when quarterly interest statements are received. The confusion often is due to the fact that a check is not issued so no cash is actually received at this point in time. The asset account however needs to be increased to reflect the interest that has been earned. This entry will adjust the asset account on the parish books to agree with the amount St. Ambrose Financial Services, Inc. shows as the deposit balance. The entry to record this is as follows assuming we use the Parish Main account (1111) as our deposit account. The
Fin.I.C.page 8 current interest earned on the quarterly interest statement is $10.00. Account Account Title Number Debit Credit Parish Main 1111 10.00 Parish Interest Rec. 1441 10.00 2. Recording a loan payment to St. Ambrose Financial Services, Inc. when the monthly interest billing is received. The current interest billed is $50.00 and you are paying $150.00 for principal reduction for a total of $200.00. Account Account Title Number Debit Credit Parish N/P Principal SAF Loan 1211 150.00 Parish Interest Paid on Loans From SAF 1581 50.00 Parish Main 1101 200.00 3. Recording interest penalties on parish accounts payable for unpaid bills and quotas to St. Ambrose Financial Services, Inc. for balances over 90 days past due. The current interest penalty is $5.00. Account Account Title Number Debit Credit Other Disbursements 1584 5.00 Parish Accounts Payable SAF 1201.02 5.00
Fin.I.C.page 9 4. Recording the receipt of a check for a requested withdrawal from monies invested in St. Ambrose Financial Services, Inc. Deposit & Loan Fund. The entry to record this is as follows assuming we use the Parish Main account (1101) as our cash account and Parish Main (1111) as our deposit account for the funds that were held by St. Ambrose Financial Services, Inc. Account Account Title Number Debit Credit Parish Main 1101 5,000.00 Parish Main 1111 5,000.00 BANK RECONCILIATION The bank reconciliation form is used to verify the balances of cash accounts. The purpose is to reconcile the balance on the bank statement with the amount recorded on the balance sheet. A bank reconciliation should be filled out for the checking account, and it is recommended that a reconciliation is done for every bank account. A sample bank reconciliation form is included. The steps for completing a bank reconciliation are detailed below. 1. The parish receives the bank statement. The ending balance on the bank statement is recorded as the Balance per Bank Statement. 2. Any deposits in transit are recorded in the appropriate section. A deposit in transit is a deposit that has been recorded in the Cash Receipts Journal but does not appear on the bank statement. 3. The outstanding checks for the month are listed on the right-hand side of the form. An outstanding check is a
Fin.I.C.page 10 check or other reduction that is recorded in the Cash Disbursements Journal or Payroll Journal but does not appear on the bank statement. Also check to see if the outstanding items from the previous month have cleared the bank this month; if they have not, they should be recorded as outstanding this month. 4. The amount of outstanding checks is totaled, and this total is recorded in the appropriate section on the left-hand side of the form. 5. The Reconciled Bank Statement Balance is computed. This number is the Balance Per Bank Statement plus the total Deposits in Transit less the total Outstanding Checks. 6. The Beginning Balance Per Books is recorded on the appropriate line. This number is the Reconciled Balance from the previous month s Bank Reconciliation. 7. The Cash Receipts Journal total for this account is recorded. 8. Any other increases to this account are recorded. These are items that appear on the General Journal. 9. The additions to the account are totaled and recorded in the appropriate spot. 10. The Cash Disbursements Journal total for this account is recorded. 11. The total of the Check Amount column of the Payroll Journal for this account is recorded. 12. Any other decreases to this account are recorded. These are items that appear on the General Journal. 13. The withdrawals from the account are totaled and recorded in the appropriate spot.
Fin.I.C.page 11 14. The Reconciled Book Balance is computed. This amount is the Beginning Balance Per Books plus the Total Additions less the Total Withdrawals. 15. The Reconciled Bank Statement Balance should equal the Reconciled Book Balance. 16. Review all outstanding checks periodically as to why they have not been cashed. A suggestion is to do so at least quarterly. Some vendors may have lost checks and the checks may need to be re-issued or you may have to simply write them off. If the two balances are not equal, there are a number of possible errors to look for. Recalculate all of the numbers to make sure the math is right. Review the deposits in transit and outstanding checks to see if any were missed, including outstanding items from previous months that still have not cleared, and that the correct amounts were recorded for all outstanding items. Also look for automatic charges or deposits such as service charges or interest that are on the bank statement but were not recorded in the journals. Look for discrepancies between transaction amounts on the bank statement and the journals, such as a check recorded as $9.83 on the bank statement but $9.88 on the Cash Disbursements Journal.
Fin.I.C.page 12 Bank Reconciliation Parish Name Account Number For the Month of Balance per Bank Statement Add: Deposits in Transit Outstanding Checks Check Amount Total Deposits in Transit Less: Outstanding checks Reconciled Bank Statement Balance Balance Per Books-Beginning Add: Receipt Journal Other Total Addition Less: Disbursements Journal Payroll Journal Other Total Subtractions Reconciled Balance Per Books