What is the difference between expense accounts and internal accounts and how should they work?


Expense accounts and internal accounts are designed to help you have a clear picture of the church finances. Each account has a specific purpose. To show these purposes, we are going to walk through an example of how funds flow through the church books. We are going to use Faith Promise funds.

An internal account is designed to keep track of how much money we have. This is money that we have on hand right now that has been designated for a given account. To start the example, let's say it is day one of a new fiscal year. And on day one, we will assume that we have zero dollars for Faith Promise.

Internal Account (amount on hand):
Faith Promise balance:  $0.00

We then collect our first offering of the year. We receive $250 for Faith Promise. When posting the deposit, we will designate that $250 will go into our Faith Promise internal account.

Internal Account (amount on hand):
Faith Promise balance:  $0 + $250.00 = $250.00

We then receive other offerings throughout the first month. Each week, we deposit the funds into the Faith Promise account so that we know how much money we have has been designated for Faith Promise. By the end of the month, we have collected an additional $1,129.50.

Internal Account (amount on hand):
Faith Promise balance:  $250.00 + $1,129.50 = $1379.50

We are now at the end of the month, and it is time to send in our first check for World Evangelism Fund (WEF). It is at this point that we need to introduce the expense accounts. An expense account is designed to keep track of how much money has been spent. Since we haven't written a check for WEF, our WEF expense account shows zero dollars paid.

Expense Account (amount paid):
World Evangelism Fund: $0.00

When writing a check, we must select an expense account and an internal account. To determine the correct account to select, we need to ask 2 questions. When selecting an expense account, answer the following question: What am I paying for? In this example, we are paying for World Evangelism Fund so that is the expense account we should select. If this were a check for the pastor's salary, we would use the Pastoral Support - Salary account. Choose the expense account that represents what is being paid.

When selecting the internal account, answer this question: What funds am I going to use to pay for this expense? In this example, we are going to use Faith Promise funds to pay for this expense. If this were a check for the electric bill, we would use the Church - General Operating internal account. General Operating is the account that is typically used for regular tithes and offerings. And since we use tithe money to pay the electric bill, that is the account we would select on a check to the electric company.

So lets say we are going to write a check for WEF in the amount of $905.00. Let us see what that does to our accounts.

Internal Account (amount on hand):
Faith Promise balance:  $1379.50 - $905.00 = $474.50
Expense Account (amount paid):
World Evangelism Fund: $0.00 + $905.00 = $905.00

So the Faith Promise internal account shows we have on hand, in our bank account, $474.50 that is designated for Faith Promise. Our expense account shows we have paid out $905.00. That is the first month, lets look at the second month.

In the second month, we have additional offerings for Faith Promise in the amount of $868.25.

Internal Account (amount on hand):
Faith Promise balance:  $474.50 + $768.25 = 1242.75

We write a check for WEF in the amount of $1087.60.

Internal Account (amount on hand):
Faith Promise balance:  $1242.75 - $1087.60 = $155.15
Expense Account (amount paid):
World Evangelism Fund: $905.00 + 1087.60 = $1992.60

At the end of the second month, our Faith Promise funds have been reduced to $155.15. The $155.15 is the amount of money we have in the bank that has been designated for that purpose but that has not yet been spent. The WEF expense account shows we have paid, this year, a total of $1992.60.

This same process will continue as you go throughout the year. The internal account balance will increase and decrease depending on the money received and spent. The expense account will continue to increase as more money is sent for World Evangelism Fund. And we now have a clear picture of both how much money has been spent and how much money we have in our bank account.