Preserving Origins
In a state far away, many years ago, a church treasurer told the church board that there were sufficient funds to remodel their bathrooms. Unfortunately, the treasurer had failed to label the donations correctly, and after the construction was finished, the board learned that they had just spent their Mission Group's Building Fund! When this church had to take out a loan and make payments, it made the board very unhappy and put them in accusation and finger-pointing mode, which affected their ability to work together for some time.
Preserving the origin of donations (where they came from and how they are supposed to be used) is so important for many reasons, such as trust between members and transparency, to say nothing of IRS and State regulations. Preserving donation origin is the job of the “Local Funds.” If there had been a “Local Fund” labeled “Mission Group – Building Fund” then that treasurer’s error and its consequences to the church could have been avoided.
- NOTE: “Bank Accounts” do not usually have the ability to adequately and accurately preserve the origins of donations. “Local Funds” do. If documented correctly, Jewel local funds can tell you who donated every dollar that was ever given to your church’s Building Fund and when it was given (during the time your church has been using Jewel). And if and how those donations have been spent. This information is vital when it comes to protecting trust funds.
So, what can happen when origin is not preserved? The following is a fictional example:
Transfer Entered Incorrectly
The church board notices that $10,000 is sitting in the local Building Fund and won’t be needed for some time, so they authorize the treasurer to “send $10,000 from Building Fund to the Revolving Fund in order to earn interest.”
The treasurer enters the check into Jewel as requested, taking $10,000 from the Building Fund, and mails it to the Revolving Fund. They have forgotten to ask the critical question “Am I spending this money or am I moving it?” Writing the check this way, posting it to a local fund, tells Jewel that the entire $10,000 is being spent, rather than being transferred.
As a result, the financial summary now shows that $10,000 has vanished from the Ending Balance. The “Checking Account Ending Balance” has decreased by $10,000. The “SURF – Building Fund” still has no money in it, and no transactions in this time period, so doesn’t show up on the report at all. The local “Building Fund” now has lost everything and is showing a zero balance.
Reconciliation Trouble
Since the check was recorded as a payment from checking, the checking account has a record of the $10,000 check and so can be reconciled at the end of the month. The Revolving Fund account however, cannot be reconciled, since Jewel has no record so far of any money going into the Revolving Fund.
The SURF (Southern Union Revolving Fund) quarterly statement arrives, weeks or months later, and reconciliation is attempted. A General Journal Entry deposit to SURF is eventually created so that a deposit to SURF shows up and can be checked off. And since a local fund is requested, the $10,000, instead of being posted back to Building Fund to replace what was incorrectly taken, is entered as a deposit to something like Church Budget. (This happens more than you might think.)
Loss of Origins
Now everything is reconciled, and the “Bank Account Total Ending Balances” are corrected, but this $10,000 has been removed, in two separate moves, from Building Fund and deposited into Church Budget.
Now, all records of the origins (donors, dates, etc) of this money has been left behind. If we look up that deposit in church budget, we see the General Journal Entry, which doesn’t help us know where the money actually came from.
- NOTE: Yes, the origin can be tracked down and followed back to the source, but many treasurers wouldn’t know how to do it, and might not understand why they should.
Misspent Funds
Our fictional church currently has several local funds with negative balances, so at the end of the month, the treasurer is authorized, by a happy board, thinking that there were lots of offerings that month, to make transfers to zero out the negatives. As a result, that $10,000 of Building Fund donations is moved into various other local funds such as Custodial Expenses, Insurance, and School Subsidy, to cover expenses that have already been paid.
Trust Funds, donations originally given specifically for the Building Fund, have now been used illegally, to pay Insurance and School Subsidy. It was not on purpose, but from a lack of understanding.
At the next board meeting, a member, noting the local Building Fund has a zero balance, says "What happened to our Building Fund? Where did that money go?"
And the treasurer, who doesn't understand how it works, says "It is in the SURF account," and points to the top section of the Financial Summary. And everyone is satisfied with that answer. After all, the SURF account is (incorrectly) labeled "SURF - Building Fund."
The Truth Comes Out
But when a building project comes along, they will learn that the local funds guard the origins, and the bank accounts do not. And that $10,000 of Building Funds was already spent on the abovementioned transfers. And that, although that bank account is called “SURF – Building Fund,” the money that is in it does not belong to the Building Fund. And unless an auditor takes time to follow that $10,000 back, figure out what happened and reverse what was done, (which will put those local Funds such as School Subsidy back in the negative) the donations given to the Building Fund have been spent.
Yes, it happens. We have seen similar scenarios played out a number of times, some just slightly annoying and others more disturbing.
TO RECAP
- Moving funds between local Funds in such a way that origin is lost should never be done.
- In most cases, bank accounts should not be labeled with origins.
- General Journal Entries should not be used to correct transfers that were made incorrectly. Delete or reverse the General Journal Entry, and use a Transfer instead.
- If a transfer between bank accounts has you puzzled, contact your support person.
- Right then. Don’t wait for months to get help.