When reviewing the chart of accounts, users may notice that there are two pre-configured accounts under Equity called Book Equity and Retained Income.
By default, Church360° manages equity within the software. Users are not required to create equity accounts but can do so by transferring a portion of Book Equity into a user-created equity account. For more complicated uses of equity, it is recommended only for those with advanced accounting experience. To allow for more transparency, calculations made to keep the accounting equation in balance are done automatically in the system.
Book Equity
The accounting equation in its most basic form is that of total assets of a chart of accounts equaling the sum of total liabilities and total equity. In very generalized terms, asset accounts hold what an entity has overall, divided into what has to be paid back (liabilities) and what can be considered to be owned by the entity (equity).
This means when users add balances to their created accounts, the total balance of all liability and equity accounts created are subtracted from the total balance of all created asset accounts to create an additional calculation called Book Equity. This account will continually recalculate as other accounts are updated to maintain balance.
Retained Income
Additions to the accounting equation include income and expense accounts. These offset accounts do not house actual balances like assets, liabilities, and equity do; they simply track money that comes in and out throughout the fiscal year. But at the end of the year, the net income (income minus expense) is considered part of an entity's equity. Some organizations prefer to report this money in its own grouping. After reviewing feedback to include this distinction, Church360° now calculates this net income under its own equity account called Retained Income.
In the Ledger system, this means that when a new fiscal year begins, all income and expense accounts are brought back to a zero balance. The net income amount is then transferred into the Retained Income equity account for the remainder of the year. When the fiscal year comes to an end, that amount under Retained Income is transferred into Book Equity in order to be replaced with a new net income amount. At any one time, the Retained Income account will only ever hold the net income for the fiscal year immediately preceding the current fiscal year.
Funds
Accounts reserved for special purposes, called equity-backed Funds, act very similar to how income and expense accounts have their difference added to equity.
When a Fund is created in the Chart of Accounts, three accounts are created: an income account to track what comes in during the fiscal year, an expense account to track what goes out during the fiscal year, and an equity account to carry the Fund's balance year after year.
Similar to Retained Income, at the end of the year, the income and expense accounts for the Fund are zeroed out, and the difference between the two are added to the equity face whose balance will carry over to the next year.
The End of Year Calculation
To sum up all of the automatic calculations that take place at the transition to a new fiscal year, the three tasks that take place are as follows:
1. The balance found under Retained Income during the concluding year is consolidated into Book Equity.
2. The balance total of all expense accounts are subtracted from the balance total of all income accounts (barring those belonging to Funds). The net income amount is moved to Retained Income for the upcoming fiscal year.
3. The balance total of each Fund expense account is subtracted from the balance total of their respective Fund income account. The net income amount is then added to the Fund equity balance which will be carried over into the next fiscal year.
As an example, a chart of accounts could have the following totals for each account on December 31st of an ending fiscal year below:
First, the $200 under Retained Income is added to the Book Equity total, increasing it from $1000 to $1200.
Next, the difference between all non-Fund income accounts ($500) and all non-Fund expense accounts ($350) is attributed to Retained Income, making its new balance $150 for the upcoming fiscal year.
For each Fund account, the difference between a Fund income account ($700) and its respective Fund expense account ($250) are added to the current total of the Fund equity account, updating its balance from $500 to $950.
Now, these same accounts will now hold the following balances on January 1st of the new fiscal year.