Finance

Masjid accounting is a specialized form of nonprofit accounting governed by two core principles: Amanah (the sacred trust of managing community funds) and Transparency (the duty to be open and accountable to donors).

Unlike for-profit businesses, the goal is not to make a profit but to ensure financial stewardship and mission fulfillment. This requires a unique system for tracking, managing, and reporting money.

Here is a comprehensive overview of everything a mosque's leadership should know about its accounting.

The Core Concept: Fund Accounting

The single most important concept in mosque accounting is fund accounting.

A for-profit business has one big pot of money ("Equity"). A nonprofit, like a masjid, has multiple pots, or "funds." This system is designed to separate money based on its intended purpose.

There are two primary types of funds (or "Net Assets"):

1. Net Assets Without Donor Restrictions (Unrestricted): This is the mosque's main operating fund. Donations given in the general Friday collection box, membership fees, and non-specific online donations fall here. This money can be used for any legitimate operational expense, such as:

   • Imam and staff salaries

   • Utility bills (electricity, water, gas)1

   • Prayer hall maintenance and cleaning supplies

   • General office expenses

2. Net Assets With Donor Restrictions (Restricted): This is money donated for a specific purpose dictated by the donor. This is a legal and ethical obligation. You cannot use this money for general operations.

This is where masjids face their biggest challenge.

The 3 Sacred Funds: A Critical Distinction

The most common and dangerous accounting error a masjid can make is mixing restricted funds. A mosque's accounting system must have separate "classes" or "funds" to track these categories.

1. Zakat Fund (Highly Restricted)

This money does not belong to the mosque. It is a trust (Amanah) collected on behalf of the poor.

• Source: Donations where the donor explicitly states "This is for Zakat."

• Allowable Uses: Only the 8 categories specified in the Qur'an (Surah At-Tawbah, 9:60). This is typically managed by a Zakat committee.

• Prohibited Uses: It cannot be used for building expansion, paying the Imam's salary, covering utility bills, or funding general programs. Using Zakat for operations is a severe breach of trust.

• Accounting: On your "Statement of Financial Position" (Balance Sheet), Zakat funds waiting to be distributed should be listed as a Liability (e.g., "Zakat Payable") because it's money you owe to the poor.

2. Building / Project Fund (Restricted)

This is money collected for a specific capital project.

• Source: Fundraisers and donations explicitly marked for "New Masjid," "Building Expansion," "Parking Lot," or "Madrassa Project."

• Allowable Uses: Only for expenses directly related to that project (architect fees, construction materials, permits).

• Prohibited Uses: Cannot be "borrowed" to make payroll or pay the electric bill.

3. General Operations / Sadaqa Fund (Unrestricted)

This is the money that actually runs the mosque.

• Source: Friday (Jumu'ah) collections, general online donations, membership dues, and event tickets.

• Allowable Uses: All legitimate operational expenses approved in the budget.

Essential Policies & Internal Controls

Because of the high volume of cash and the sacred nature of the funds, strong internal controls are not optional; they are an ethical necessity to protect the Amanah and prevent fraud or error.

1. Donation Handling (The Two-Person Rule)

This is the most vulnerable area.

• Collection: Donation boxes should be sealed and stored in a secure location.

• Counting: Money should never be counted by one person. A minimum of two unrelated, approved volunteers or staff must count the money together.

• Documentation: Both counters must fill out and sign a Donation Log Sheet that records the total cash and checks.

• Deposit: One person (e.g., the Treasurer) takes the cash/checks to the bank, and the Donation Log Sheet is given to the bookkeeper/accountant. The bookkeeper then reconciles the bank deposit slip with the log sheet.

2. Segregation of Duties

This is the #1 principle of internal control. Different people should be responsible for different parts of a financial transaction. In a small mosque, this can be hard, but it's crucial.

• Person A (e.g., Committee Chair) approves an expense.

• Person B (e.g., Treasurer) issues the payment.

• Person C (e.g., Bookkeeper) records the transaction.

• Person D (e.g., Board President) reviews the bank statements and reports.

Crucially: The person who approves a payment should never be the same person who signs the check.

3. Expense & Check-Signing Policy

• Reimbursements: No one should ever approve their own expense report. All reimbursement requests must have original receipts and be approved by a supervisor or board member.

• Check Signing: All checks should require two signatures for any amount over a set threshold (e.g., $1,000). Check signers should not be related to each other.

• Budgeting: All spending must be approved in the annual budget. Any significant, unbudgeted expense must require a formal vote by the Board of Directors.

Financial Reporting & Transparency

You must be able to explain to your community where their money came from and how it was spent.

1. Key Financial Reports

Your accounting software (like QuickBooks Nonprofit) should be set up to produce these three reports monthly for the Board:

1. Statement of Financial Position (Balance Sheet):

   • Assets: What you own (e.g., Cash in bank, building, equipment).

   • Liabilities: What you owe (e.g., Loans/mortgage, Zakat funds to be distributed).

   • Net Assets: The community's "equity," broken down by fund (Without Donor Restrictions and With Donor Restrictions).

2. Statement of Activities (Income Statement):

   • Revenue: Where money came from (donations, Zakat, event fees), tracked by fund.

   • Expenses: Where money went (salaries, utilities, programs, Zakat distribution).

   • Change in Net Assets: Whether you operated at a surplus or deficit for the period.

3. Budget vs. Actual (The Board's Most Important Report):

   • This report compares what you planned to spend (Budget) with what you actually spent (Actual).

   • It allows the board to ask critical questions: "Why did we overspend on utilities?" or "Why is our fundraising for the school project behind schedule?"

2. Transparency with the Community

• Annual General Meeting: The Treasurer must present a summary of these financial reports to the general members at least once a year.

• Public Access: Large masjids should make their audited financial statements and annual IRS Form 990 available on their website to build maximum trust.

Audits: The Final Step in Accountability

An audit is a formal, independent review to ensure your financial statements are accurate and you are following your own policies.

• Internal Audit: Performed by an Internal Audit Committee (as described in your "Success Committee" prompt). This independent committee, supervised by the board, spot-checks transactions, ensures the "two-person rule" is being followed, and verifies that Zakat money is separate from operating money.

• External Audit: An annual audit performed by an outside, independent Certified Public Accountant (CPA) firm. This is the gold standard of financial accountability. While expensive, it is essential for any masjid with a large budget, a mortgage, or plans for a major capital project, as banks and large grant foundations will require it.

A masjid's payment system is the complete set of policies, procedures, and controls for how the organization spends money. Accounts Payable (A/P) is a key part of this system; it's the accounting term for the money your masjid owes to others for goods or services you've already received (e.g., unpaid bills from the utility company, a cleaning service, or a guest speaker).1

Managing this process properly is a fundamental component of Amanah (sacred trust), as it involves protecting the community's donations.

Core Principles of Masjid Payment Systems

Before establishing a procedure, you must ground it in these principles:

1. Amanah (Trust): Every payment must be legitimate, appropriate, and serve the mission of the masjid. You are a steward of the community's wealth.

2. Internal Control: You must have policies that prevent fraud, error, and misuse of funds.2 The most important control is segregation of duties.

3. Segregation of Duties: The person who approves a payment should never be the same person who writes the check or makes the payment. Furthermore, the person who records the transaction in the accounting software should be, if possible, separate from the one who makes the payment.

4. Fund Accounting Compliance: Payments must be drawn from the correct fund. You cannot pay an electric bill (an operating expense) using money donated for Zakat (a restricted fund). The payment system must respect these restrictions.

5. Transparency: The process must be clear and auditable, so the Board and members can be confident that all expenses are valid.3

Key Roles in the Payment System

A strong system involves several people, each with a distinct role:

• Initiator (Staff/Committee Chair): A person who identifies the need for a purchase (e.g., the Maintenance Chair needs a plumber).

• Approver (Budget Holder): The person with the authority to approve an expense against their budget (e.g., the Maintenance Chair, the Imam for religious expenses).

• Bookkeeper/Accountant: The person who receives approved bills, enters them into the accounting system (creating the "Account Payable"), and prepares the payment (e.g., prints the check).

• Check Signer(s) (Treasurer/Board Officers): The authorized individuals (usually 2) who review the approved bill and the check, and then physically sign it.

• Reconciler (Independent Board Member): A person (like the Board President or Audit Committee member) who reviews the final bank statement to ensure all payments match the records.

The Accounts Payable (A/P) Workflow: A Step-by-Step Guide

This is the standard procedure for handling a bill from the moment it arrives to the moment it's paid.

Image of accounts payable workflow diagram

Step 1: Receive the Invoice

A vendor (e.g., your utility company, a guest speaker, or a plumbing contractor) sends a bill (invoice) to the masjid office.

Step 2: Verify and Approve the Invoice

This is the most critical control step.

1. The invoice is forwarded to the head of the department that received the service (e.g., the Maintenance Chair).

2. This "Approver" must verify two things:

   • Accuracy: "Did we actually receive this service? Is the price correct?"

   • Budget: "Do I have money in my committee's budget to pay for this?"

3. The Approver signs or digitally approves the invoice, adding the correct budget code (e.g., "6100 - Utilities" or "7200 - Maintenance").

Step 3: Enter the Bill into Accounts Payable

1. The approved invoice is given to the bookkeeper or accountant.

2. They enter the bill into the accounting software (like QuickBooks). At this moment, it officially becomes an Account Payable—the system now shows that the masjid owes this money.

Step 4: Prepare the Payment

1. On a set schedule (e.g., every Friday), the bookkeeper runs a report of all bills due.

2. They prepare the payments. This means printing the physical checks or setting up the ACH/online bill payments.

Step 5: Authorize and Sign the Payment (Segregation of Duties in Action)

1. The bookkeeper presents the unsigned checks to the authorized check signers (e.g., the Treasurer and the Board President).

2. Crucially, the checks are bundled with the original, approved invoices and any purchase orders.

3. The signers review the documentation to ensure the payment is for a valid, approved expense.

4. If everything is correct, both signers sign the check.

Step 6: Send Payment and Record the Transaction

1. The check is mailed, or the digital payment is released.

2. The bookkeeper marks the bill as "Paid" in the accounting software. This moves the amount out of Accounts Payable and reduces the "Cash" on the balance sheet.4

Payment Methods and Specific Controls

Method

Best For...

Key Controls to Enforce

Checks

Most vendor payments, guest speaker honorariums, contractor payments.

• Two-signature rule for all checks over a set amount (e.g., $500). • Never sign a blank check. • Store blank check stock in a locked cabinet.

ACH / Online Bill Pay

Recurring monthly bills like utilities, internet, and insurance.

• Requires a two-person digital approval process. • The person initiating the payment must not be the one authorizing its release. • Review the bank statement monthly to ensure amounts are correct.

Masjid Credit Card

Small online purchases, software subscriptions, office supplies. (Use with extreme caution).

• Strict policy: The card is for masjid business only. • Low credit limit (e.G., $2,000). • Itemized receipts must be submitted for every single transaction. The cardholder must submit an itemized expense report monthly, which is then approved by their supervisor or the Treasurer.

Expense Reimbursements

Paying back volunteers or staff for supplies they bought with their own money.

• Requires a formal Expense Reimbursement Form. • Original, itemized receipts must be attached. • Must be approved by a supervisor (no one approves their own expenses). • Must be paid by check or direct deposit, not petty cash.

Petty Cash

Very small, immediate purchases (e.g., stamps, a quick hardware-store run for $20).

• A small, fixed amount (e.g., $150) kept in a locked box. • A Petty Cash Log is mandatory. To take cash out, a receipt for the exact amount must be put in. • When the cash runs low, the log and receipts are submitted to be "reconciled" and refilled via a single check.

Masjid Human Resources (HR) is the formal system for managing a mosque's most valuable assets: its people. This includes both paid staff (like the Imam, administrator, and custodian) and its extensive volunteer workforce.

Unlike corporate HR, masjid HR operates on the principle of Amanah (sacred trust). It's not just about compliance; it's about being a just, fair, and professional steward of the community's trust and resources. Its primary goal is to build an organizational structure that protects the masjid, its staff, its volunteers, and its mission.

The Role of the HR Committee 👥

Most masjids don't have a full-time HR department. Instead, the Board of Directors establishes a volunteer HR Committee.

• Who They Are: This committee should be composed of community members with professional experience in human resources, management, or employment law. Discretion and confidentiality are essential qualities for its members.

• What They Do: The committee advises the Board and implements HR policies. They do not make final decisions on hiring or firing (the Board does) but rather manage the process to ensure it is fair, legal, and objective.

• Who They Report To: The HR Committee is a standing committee that reports directly to the Board of Directors.

Core Function 1: Paid Staff Management

This is the "traditional" side of HR, focusing on anyone who receives a paycheck.

1. Recruitment and Hiring

This function ensures the masjid hires qualified individuals through a fair and transparent process.1

• Imam Search: The HR Committee (or an ad hoc search committee) manages the entire Imam hiring process. This includes drafting the job description, advertising, screening candidates, conducting interviews, checking references, and presenting a final recommendation to the Board.

• Staff Hiring: Manages the hiring of all other staff (e.g., office administrator, Quran teacher, maintenance staff).

2. Job Descriptions and Compensation

This is one of the most critical functions for preventing conflict.

• Job Descriptions: Creates a clear, written job description for every paid position. This document is the foundation for all HR actions.

  • For the Imam: It clarifies his roles and responsibilities versus those of the Board. (e.g., Imam is responsible for religious programming; Board is responsible for financial oversight.)

  • For Staff: It defines tasks, working hours, and who they report to.

• Compensation: The HR committee researches and recommends fair salaries and benefits packages to the Board, ensuring compliance with state and federal wage laws.

3. Performance Management

This moves evaluations from being personal to being professional.

• Process: The committee establishes a formal, annual performance review process.

• Objectivity: The review is based only on the employee's performance as measured against their written job description. This creates a neutral and fair process for giving feedback and identifying areas for growth.

• Imam's Review: The HR committee facilitates the Board's annual review of the Imam, a critical governance function.

4. Payroll and Benefits

The HR committee oversees the administrative side of employment.

• Payroll: Ensures staff are paid correctly and on time, and that all payroll taxes are properly withheld and paid.

• Compliance: Manages employment forms (like the I-9 for work authorization) and determines if staff are "exempt" or "non-exempt" under the Fair Labor Standards Act (FLSA) to ensure proper overtime pay.

• Benefits: Manages any benefits offered, such as health insurance or paid time off.

5. Discipline and Termination

This function protects both the employee and the masjid.

• Policy: Creates a clear policy for disciplinary action (e.g., verbal warning, written warning, suspension, termination).

• Process: When a manager (or the Board) has an issue with an employee, HR ensures this policy is followed.

• Termination: Manages the termination process to ensure it is legal, documented, and based on clear, pre-defined causes (e.g., gross misconduct, violation of policy, poor performance).

Core Function 2: Volunteer Management

Volunteers are the lifeblood of a masjid. HR's role is to structure and protect this vital workforce.

1. Volunteer Onboarding

• Application: Creates a formal volunteer application to collect contact information, skills, and interests.

• Code of Conduct: Requires all volunteers to sign a Volunteer Code of Conduct that outlines expectations for behavior, confidentiality, and representing the masjid.

2. Screening and Safety (Critical Function) 🛡️

This is the masjid's most important liability protection.

• Background Checks: The HR committee must have a policy to conduct a formal national criminal background check on any volunteer working with:

  • Children (weekend school teachers, youth group leaders, childcare)

  • Money (donation counters, finance committee)

  • Vulnerable Adults (social services)

• This is a non-negotiable legal and ethical duty to protect the community.

3. Training and Recognition

• Training: Ensures volunteers are trained for their roles (e.g., safety and security training for the parking team, basic financial controls for donation counters).2

• Recognition: Creates a program to thank and retain volunteers, such as an annual volunteer appreciation dinner, small awards, or public recognition.3

Core Function 3: Policy, Compliance, and Conflict Resolution ⚖️

This is the "protection" function of HR. The committee creates the rules and systems that ensure a safe and fair environment.

1. The Employee & Volunteer Handbook

This is the single most important document HR will create. It is approved by the Board and given to all staff and volunteers. It includes key policies such as:

• Code of Conduct: The expected Islamic and professional etiquette.

• Anti-Harassment & Discrimination Policy: A zero-tolerance policy for any form of harassment.

• Conflict of Interest Policy: Prevents board members or staff from making decisions that benefit them personally.

• Complaint Procedure: A clear, confidential process for who to go to with a problem.

• Safety & Security Policies: Rules for building access, emergencies, etc.

2. Legal Compliance

While masjids are religious organizations, they are still employers and must follow most US labor laws.

• EEO: The Equal Employment Opportunity Commission (EEOC) laws apply. A masjid cannot discriminate in hiring based on race, gender, or national origin.

• Ministerial Exemption: This is a key legal exception. Religious organizations can legally discriminate based on religion for "ministerial" roles. For example, a masjid can legally require its Imam to be a practicing Muslim.

• Safety: Ensures compliance with OSHA (Occupational Safety and Health Act) standards for a safe workplace.

3. Conflict Resolution & Complaint Management

This is one of HR's most essential roles.

• Neutral Intake: The HR committee acts as a confidential and neutral "front door" for complaints.

• The System: It creates a system to answer:

  • "What does a community member do if they have a complaint about a staff member?"

  • "What does a staff member do if they have a conflict with a board member?"

  • "What does a volunteer do if they are being harassed by another volunteer?"

• The HR committee receives the complaint, logs it, and (based on policy) refers it to the correct person (e.g., the Imam, the Board President) for resolution, ensuring the issue is handled fairly and not just ignored.

A masjid's relationship with the tax system in the United States is unique compared to other nonprofits. Here’s a breakdown of the key aspects:

Income Tax Exemption: 501(c)(3) Status

• Automatic Exemption: Mosques, like churches, synagogues, and other houses of worship, are generally automatically considered tax-exempt under section 501(c)(3) of the Internal Revenue Code without needing to formally apply to the IRS.1 This means the mosque itself doesn't pay federal income tax on its primary religious, charitable, and educational activities.

• Requirements for Automatic Status: To qualify, the mosque must operate exclusively for religious purposes, its net earnings cannot benefit private individuals (like board members), and it must not engage in substantial lobbying or any political campaign intervention.2

• Why Apply Anyway? Many mosques voluntarily apply for official 501(c)(3) recognition by filing Form 1023 with the IRS.3 Doing so provides:

  • Donor Assurance: An official IRS determination letter assures donors their contributions (including Zakat and Sadaqa) are tax-deductible.4

  • State Benefits: Official status is often required to get state sales tax or employment tax exemptions.

  • Grant Eligibility: Foundations and government grants usually require the official IRS letter.

  • Transparency: Although not always required, filing annual returns (Form 990) increases transparency.

Unrelated Business Income Tax (UBIT)

• What it is: While donations and program fees related to the mosque's religious mission are tax-exempt, income from activities that are regularly carried on and not substantially related to the mosque's exempt purpose can be taxed.5 This is called Unrelated Business Income Tax (UBIT).

• Common Examples:

  • Renting out the mosque parking lot to a nearby business during weekdays.

  • Operating a bookstore that sells items beyond religious materials.

  • Selling advertising space in the mosque newsletter to general businesses.

• Threshold: If a mosque has $1,000 or more in gross income from unrelated business activities in a year, it must file Form 990-T and pay corporate income tax on the net profit from that activity.6

• Exceptions: Passive income (like interest, dividends, and most rental income from property not financed by debt) is generally excluded from UBIT.7 Income from activities run substantially by volunteers is also often exempt.

Donor Contributions: Tax Deductibility

• General Rule: Donations (Sadaqa) made to a mosque recognized as a 501(c)(3) organization are generally tax-deductible for the donor on their federal income tax return, provided they itemize their deductions.8

• Zakat: Zakat payments made to a qualified 501(c)(3) mosque (that will distribute it according to Sharia rules) are also considered tax-deductible charitable contributions under US law.9

• Masjid Responsibility: The mosque must provide a written acknowledgment for any single donation of $250 or more. This receipt must state the amount, whether any goods or services were provided in return, and confirm the mosque is a 501(c)(3).

Property Tax Exemption

• General Rule: Property owned by a religious organization and used primarily for religious worship or purposes reasonably necessary for such worship (like a parsonage or religious school) is typically exempt from local property taxes.

• State/Local Matter: This exemption is governed by state and local laws, not the IRS. In Indiana, for example, buildings used for religious worship, the land they sit on, and parsonages (up to 15 acres) are exempt.10

• Application Required: Unlike the automatic federal income tax exemption, mosques usually need to formally apply to their local county assessor's office to receive property tax exemption and may need to refile periodically.

Payroll Taxes & Ministerial Status

• Employer Responsibilities: Like any employer, a mosque must withhold and pay federal and state income taxes for its regular employees (administrators, non-ministerial teachers, maintenance staff).11 It must also pay the employer's share of Social Security and Medicare taxes (FICA) for these employees.

• Imam/Ministerial Staff (Dual Status): Duly ordained, commissioned, or licensed ministers (like Imams) have a unique "dual status" for tax purposes:

  • Income Tax: They are considered employees. The mosque can withhold income tax if requested via a Form W-4, but it's not mandatory.

  • Social Security & Medicare: They are considered self-employed (SECA, not FICA). The mosque does not pay the employer share, and the Imam is responsible for paying the full self-employment tax (currently 15.3%) on their salary plus their housing allowance.

• Housing Allowance (Parsonage): An amount formally designated in advance by the mosque board as a housing allowance for the Imam can be excluded from the Imam's gross income for income tax purposes only.12 It is still subject to self-employment tax. The excludable amount is the least of: 1) the amount designated, 2) the actual housing expenses, or 3) the fair rental value of the home (furnished, plus utilities).

• Ministerial Exemption (SECA): An Imam can apply to the IRS (using Form 4361) for an exemption from self-employment taxes if they are conscientiously opposed to accepting public insurance benefits.13 This is an irrevocable election.

Annual Filing: Form 990

• General Rule: Most 501(c)(3) organizations are required to file an annual information return with the IRS, typically Form 990, 990-EZ, or 990-N, depending on their gross receipts.14

• Church Exemption: Churches, mosques, synagogues, and their integrated auxiliaries are exempt from this annual filing requirement.15

• Voluntary Filing: Many mosques choose to file Form 990 voluntarily to enhance transparency with donors and the public.

• Form 990-T: Remember, even if exempt from Form 990, a mosque must file Form 990-T if it has $1,000 or more in gross unrelated business income.16