USA Journal entry to note "set aside) funds

[Victoria#]

I want my balance sheet to reflect that I am setting aside a certain amount of money for a long term project. I think of this as a de facto savings account. I don't want to open up a real world savings account for this purpose. I think that I should create an Other Current Asset account for the set-aside funds. Do you agree? If so, what would the journal entry be to have an amount of money show up in this Other Current Asset account? I think that I would debit the Other current Asset account to increase the balance; I'm not sure what account to debit.

I greatly appreciate your thoughts on this. Please lmk if I need to supply more information.
Regards, Victoria

 

[BIG E]

You haven't disclosed what type of business entity your business is.
You've only mentioned the setting aside the funds for a specified purpose for the asset.
However, you also need to determine how to reflect the credit - as either a long-term liability or
as a reduction of retained earnings for a corporation as Reserve for Long-Term Purpose in the equity section.

 

[DrStrangeLove]

I want my balance sheet to reflect that I am setting aside a certain amount of money for a long term project. I think of this as a de facto savings account. I don't want to open up a real world savings account for this purpose. I think that I should create an Other Current Asset account for the set-aside funds. Do you agree? If so, what would the journal entry be to have an amount of money show up in this Other Current Asset account? I think that I would debit the Other current Asset account to increase the balance; I'm not sure what account to debit.

I greatly appreciate your thoughts on this. Please lmk if I need to supply more information.
Regards, Victoria

If you plan on holding and accumulating it over several years. though, it would be a noncurrent asset, not a current asset.

As BIG E has pointed out, you haven't said what kind of entity you have. If it's a not-for-profit entity, you may have certain disclosures you need to make about use-restricted assets (see FASB ASC 958-210-50), and there may be other niceties about how you title the account you use.

 

[Victoria#]

Thank you BigE and DrStrangelove.
It's a church. It doesn't have the reporting requirements that non-profits have.
They are setting aside funds for moving to a new location. I expect it will be sometime in 2024; maybe 2025.
(Sorry, I have a typo in my question--I thought I fixed it but apparently not. I know to debit the Other Current Assets account that I will set up to track the set-aside funds. So my question is what should I credit, not what should I debit.)
BigE, do I understand you correctly that I can either credit Retained Earnings or a Long Term Liability account? I was thinking that crediting Retained Earnings might be the way to do this. It hadn't occurred to me to set up a Long Term Liability for it. I don't follow that logic, but I'm still learning.

 

[BIG E]

In a tax exempt entity - things are different than for for-profit entity.
The capital section is called "Net Assets".
However, since you are setting aside funds for a future specific purpose - then it is usually referred to
as a "Reserve" account, which is in the capital section, but a separated line than from Surplus because it
is set aside for a specific future event.
Accounting terminology for exempt entities is different than from for-profits.

 

[Victoria#]

Thank you!
So if I understand you correctly, the account I should set up to track the set-aside funds is a Reserve account, that is a Capital account, and the Capital account is an Asset account. Is that right?
If so, and I set this up, in order for the balance sheet to reflect that we are setting aside an amount of money in this account, I would create a journal entry debiting this Reserve account. What account would I credit? Retained earnings?

 

[BIG E]

NO - the Capital Account is an EQUITY ACCOUNT, not an Asset. In business corporation language it's what's called Stockholders' Equity.
And you have an incorrect assumption you continually make.
It's the Equity Account that sets aside the reserve account to segregate from other operating activities, not so much the Cash account in the Asset section of the balance sheet.

 

[Victoria#]

Thank you for setting me straight on this.
So I create an equity account for the set-aside funds. I create a Journal Entry crediting this account in the amount that we want to set-aside. Would the debit side of the Journal Entry also be from an Equity account? Retained earnings?
Thank you for your patience and prompt replies.

 

[BIG E]

The debit side of the journal entry already comes from the cash that the organization receives. It is not really necessary to
set up a new asset account as described in prior posts.

You see - what happens is the fiscal year of the entity closes when all the accounting work is done.
Then what happens is from the already accumulated balance in the surplus account, you reduce the "free and unrestricted surplus" by debiting it and crediting the Reserve Account in the Equity section to show that it is earmarked for a future event/purpose.

But before that can be done, it is advisable to have the exempt organization board stipulate in its minutes that an appropriation is being made for a future purpose.

You are unfortunately getting hung up on strictly the bookkeeping journal entries rather than fully comprehending the sequence of events that occur in order to accomplish what you want.

 

[Victoria#]

Thanks very much. This is very helpful. I appreciate your time.