Church finances can be deceptively complex, especially when it comes to tracking funds that are not for general use. Two terms you will hear often are donor-restricted funds and board-designated funds. Understanding the distinction is critical for proper stewardship and clear financial reporting.
Donor-restricted funds are gifts given with specific instructions. For example, a donor may give money specifically for building maintenance, youth ministry, or missions. By law and best practice, these funds cannot be used for general operating expenses.
Board-designated funds are amounts the church board has set aside for a particular purpose, such as future property improvements or a ministry project. While these funds are not legally restricted, they are considered reserved and should also be used only for their intended purpose.
Why tracking designated funds is challenging
Most churches understand they need to track these funds, but in practice it is easy for designated funds to get mixed up with general funds if proper accounting systems are not in place. Many churches still rely on basic bookkeeping methods that do not fully separate restricted and designated funds in a way that is clear, accurate, and scalable.
Without fund accounting software or at least a well-structured system, church administrators can spend hours reconciling transactions, manually moving money, and trying to generate meaningful reports.
Three common ways churches try to track designated funds
- Liability accounts
Some churches track designated funds in liability accounts as if the church owes the funds. While this can work superficially, it is not considered GAAP-compliant because these are not true liabilities. The church is not obligated to pay a third party. - Separate bank accounts or sub-accounts
Another approach is opening different bank accounts for each fund or ministry. This can work but quickly becomes cumbersome and error-prone.
For example, we worked with a church where each ministry and designated fund had its own bank account. The church administrator had to manually transfer money between accounts to keep the books accurate and reconcile transactions. This process took hours every month and created a high risk of errors. While the system technically worked, it was inefficient and not scalable as the church grew.
- Classes and equity accounts in accounting software (preferred method)
In systems like QuickBooks Online, designated funds can be tracked using classes and equity accounts.
Each fund gets its own equity account to track balances separately from general funds.
Transactions are tagged with a class corresponding to the fund.
Reports can then show exactly how much is available in each fund and whether transactions are properly applied.
This method keeps all funds in one bank account, simplifies cash management, and allows administrators to produce clean, accurate reports without hours of manual work.
Key Takeaway
Tracking donor-restricted funds and board-designated funds is essential for proper church bookkeeping and maintaining accountability. Churches cannot use these funds for general operating expenses, so having a reliable system in place is critical.
Without a clear method, it is easy for donations to get misapplied, reports to be inaccurate, and board oversight to become confusing. Using tools like classes and equity accounts in QuickBooks Online or other accounting software allows churches to:
- Track each fund separately while keeping all money in a single bank account
- Generate accurate, fund-specific reports for boards and ministry leaders
- Ensure compliance with donor intentions and internal policies
- Reduce manual work and the risk of errors from transfers between multiple accounts
By implementing these best practices for church fund accounting, administrators can simplify bookkeeping, improve transparency, and provide leaders with reliable financial information to make informed ministry decisions.
If your church is struggling to keep designated funds organized or wants a system that saves time and ensures accuracy, we help churches set up clear, compliant bookkeeping systems tailored to their ministries. This allows leaders to focus on what matters most, serving their congregation, without worrying about the numbers.
For more on why churches need a bookkeeper who understands how church and nonprofit finances work, check out our article on nonprofit bookkeeping and ministry financial support.
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