Chapter
14
X
Expense Recognition
Parishes and schools incur many types of expenses including payroll, administration,
instructional, program and facility. The purpose of this policy is to promote a consistent
methodology for categorizing, recording and reporting parish and school expenses on
parish financial statements.
This chapter is closely related to Chapter 11 - Net Assets/Equity and Chapter 12 Revenue Recognition. Please refer to these chapters for additional information.
ACCOUNTING POLICY
The Archdiocese of Saint Paul and Minneapolis has adopted the accrual method of
accounting for recognition of parish and school expenses. The accrual method requires
recording expenses when incurred. This timing does not necessarily correspond with
receipt of vendor invoices or payments.
The Archdiocese of Saint Paul and Minneapolis has defined a standardized chart of
general ledger accounts for use by all parishes and schools. Separate accounts are
established for the wide variety of parish and school expenditures.
SCOPE
Common Expenses for parishes and schools:
Generally, an expense is recognized in the period in which a cost is incurred, a product is
consumed or a service is received.
Payroll and Employee Benefit Expenses: Payroll and employee benefit expenses
should be recognized during the periods in which employees perform their work.
In cases of parish\school employees who work twelve months of the year, expense
recognition should take place during each month based on hourly or salaried work
performed.
In cases of school staff or other parish\school personnel working a portion of the year,
payroll and benefit expenses shall be recognized only when the employees are providing
the services as outlined in their work agreement.
Recognition of expense does not always correspond with payment of wages and benefits.
For example, salaries and benefit expenses for a teacher working during a nine month
school year would be recognized only during the months of that school year. Expenses
would not be recognized during summer months regardless of whether the teacher
receives salary payments or not.
CHAPTER 14 – EXPENSE RECOGNITION
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Payroll and benefit expenses should also be recognized on a consistent basis and a full
year’s expense should be recorded each year. See journal entry example # 2 later in this
chapter.
Accounts Payable is money owed by a parish or school to its suppliers or vendors. It is
shown as a liability on a company's Statement of Financial Position/Balance Sheet.
See journal entry example # 1 later in this chapter.
At the end of the month or year, it is important to record all invoices in accounts payable
for items received or services rendered through that accounting period.
Accrued Expense: An expense that is recorded when an item has been received or a
service rendered during a given accounting period but no invoice has yet been received.
A common example of accrued expense relates to teachers who elect twelve month
payment plans for their salary and benefit expenses. Accrual accounting practices require
that no matter when they are paid, teacher salaries and benefit expenses are to be
recognized only during the months of the school year. For teachers who elect twelve
month payment plans, expenses should be accrued before salary payments are actually
made. See journal entry example # 2 later in this chapter.
Another example to illustrate accrued expenses is to consider parish\school purchases
made for a festival at the end of one fiscal year. It is especially important to accrue
expenses before the fiscal year end - even if the parish\school does not receive invoices
until the start of the next fiscal year. See journal entry example # 3 later in this chapter.
Prepaid Expense: Expenses are recognized in the year an event takes place, when a
service is performed or when a product is received. Timing of expense recognition does
not necessarily correspond to when invoices are paid.
For example, supplies may be purchased in anticipation of an annual parish or school
festival. In this case, expenses should be deferred until the event takes place. See
journal entry example #4 later in this chapter.
Another example of prepaid expense involves an annual maintenance contract where a
parish/school must pay the total contract price up front. The parish/school will pay for the
annual contract in one accounting period but will receive maintenance services for a full
year. The parish/school should record the contract as a prepaid expense when payment
is made. The parish/school should then recognize 1/12 of the total contract value as
expense and reduce the prepaid expense account by the same amount during each
month of the contract term. See journal entry example # 5 later in this chapter.
Facility and Maintenance Expense: Many facility and maintenance expenses can be
recognized as expenses when they are paid for or received. Often, facility and
maintenance expenses are received, invoiced and paid in the same periods. In these
cases, no additional accrual entries would be needed.
In the cases of many utility or municipal billings, a parish/school may receive invoices
pertaining to semi-annual time frames, quarterly periods or mid-month to mid-month
periods. The parish/school should make reasonable efforts to record expenses within the
proper month or quarter. At year-end, a parish/school should verify that appropriate levels
of annual expenses have been recorded and ensure recognition of expense is consistent
from year to year.
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Interest Expense: At the inception of any loan or lease agreement, it is important to
determine how interest is calculated and paid, as well as how all payment components will
be recorded. If a loan payment includes such items such as principal or service fees,
these should be recorded in accounts other than interest expense.
Loan billing periods seldom correlate exactly to calendar months. As a general rule, as
long as the parish/school reflects twelve months of interest expense annually and uses a
consistent recognition methodology from year to year, no additional entries are necessary
at month-end or year-end.
Assessment Expense: Archdiocesan assessment expense should be recognized on a
monthly or quarterly basis. It should be recognized during the same periods for which it
was budgeted.
Rental Expenses: If a parish/school rents out part of its facility, insurance and real estate
taxes will be incurred. These expenses may be paid yearly, semi-annually, quarterly or
monthly. Expenses should be recorded to match the year to which they apply. Year-end
entries may be necessary.
Lease Expense: See Chapter 8 - Fixed Assets for more information about capitalized
leases.
DEFINITIONS
Accounts Payable: Money owed by a parish/school to its suppliers or vendors.
Disclosed as a liability on the Statement of Financial Position.
Accrual Method of Accounting: Method of accounting that recognizes revenue when
earned, rather than when collected. Expenses are recognized when incurred rather than
when invoiced or paid.
Cash Basis Method of Accounting: Method of bookkeeping by which revenues and
expenditures are recorded when they are received and paid. The Accrual Basis of
Accounting is the accounting method adopted by the Archdiocese.
Liability: An entity’s legal debts or obligations that arise during the course of day to day
operations. Liabilities are settled over time through the transfer of economic benefits
including money, goods or services. Liabilities are recorded on the Statement of Financial
Position (Balance Sheet) and include loans, accounts payable, mortgages, deferred
revenues and accrued expenses.
Parish: Parish operations and all activities operating under the parish umbrella including
but not limited to parish ministries and departments, Men’s and Women’s clubs, Card
Club, Rosary Makers, Outreach and other activities.
Prepaid Expense: An asset on the Statement of Financial Position (Balance Sheet)
resulting from making payments for goods and services to be received in the near future.
While prepaid expenses are initially recorded as assets, their value is expensed over time
as the benefit is received onto the income statement, because unlike conventional
expenses, the entity will receive something of value in the near future.
School: School operations and all activities operating under the school umbrella including
but not limited to Extended Day, Athletics, Theater Program and Art Programs.
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Statement of Activities/Income Statement: A financial statement that measures an
entity’s financial performance over a specific accounting period. Financial performance is
assessed by giving a summary of how the entity incurs its revenues and expenses. It also
shows the net surplus or deficit incurred over a specific accounting period, typically over a
fiscal quarter, month or year.
Statement of Financial Position/Balance Sheet: A financial statement that summarizes
an entity’s assets, liabilities and net assets at a specific point in time. These three balance
sheet segments give readers an idea as to what the entity owns and owes.
The Statement of Financial Position/Balance Sheet follows the following formula:
Assets = Liabilities + Net Assets/Equity
IMPLEMENTATION GUIDANCE & JOURNAL ENTRIES
Journal Entries Examples:
1. Accounts Payable:
At the end of the month or year-end:
Debit: Supplies Expense
Credit: Accounts Payable
xxxxx
xxxxx
To recognize supplies expense. The supplies have been received, invoice has been
received, but the invoice has not been paid.
At the time of payment:
Debit: Accounts Payable
Credit: Cash
xxxxx
xxxxx
To recognize the payment of the invoice.
2. Accrued Salary and Benefits Expense:
During the months school is in session:
Debit: Salary Expense
Credit: Accrued Expense
xxxxx
xxxxx
To recognize 1/9 of annual salary and benefits for teachers.
At the time of payment:
Debit Accrued Expense
Credit: Cash
xxxxx
xxxxx
To record the actual payment of salaries for each pay period.
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3.
Accrued Expense:
At the end of the month or year-end:
Debit: Festival Expense
Credit: Accrued Expense
xxxxx
xxxxx
To recognize festival expense for the year. The event has occurred prior to the end of the
year, but the invoice has not yet been received or paid.
At the time of payment:
Debit: Accrued Expense
Credit: Cash
xxxxx
xxxxx
To recognize payment of the invoice.
4. Prepaid Expense:
At the time of payment:
Debit: Prepaid Expense
Credit: Cash
xxxxx
xxxxx
To pay festival expense and record a prepayment until the festival takes place during the
next fiscal year.
At the time of event:
Debit: Festival Expense
Credit: Prepaid Expense
xxxxx
xxxxx
To recognize festival expense and remove prepaid balance when event occurs.
5.
Prepaid Expense:
At the time of payment - prior to maintenance contract period:
Debit: Prepaid Expense
Credit: Cash
xxxxx
xxxxx
To prepay annual elevator maintenance contract.
Monthly entries when maintenance contract is in force:
Debit: Elevator Maintenance Expense
Credit: Prepaid Expense
xxxxx
xxxxx
To recognize monthly elevator maintenance contract expense (1/12 annual
prepayment).
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REFERENCES AND RESOURCES

Archdiocesan Chart of Accounts – On Archdiocesan Extranet under Finance and
Administration – Parish Financial Manual.

Accrual Method of Accounting vs. Cash Method of Accounting in Chapter 1 –
Introduction.

Allocated Allocation in Chapter 5 – Cash Disbursements.
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