Nonprofit Income Accounts Part 2: Contributions

In our last post we took a brief look at the nature of contributions, and all the many names that contributions go by. We distinguished contributions from exchange income. Today we look at accounts for contributions of cash. In-kind contributions, such as gifts of securities or other in-kind goods, services or rents, are for another post.

Ways to Categorize Contribution Income

First let’s talk about approaches to categorizing contribution income on the profit and loss report. We have seen income categorized in three main ways:

  1. By type of entity
  2. By giving level
  3. By net asset class: temporarily restricted, permanently restricted or unrestricted

Some organizations use a combination of the above. Let’s go over these options.

By Type of Entity

Categorizing contributions by type of entity is the approach we most often recommend. It follows the presentation required on audited financial statements and it allows for reporting by the categories defined in Form 990. It’s also how we set up QuickBooks To Go! Since many smaller nonprofits do not use a separate donor database, tagging donors by the nature of the entity makes it easy to pull reports on the various types of donors. Types of entities can include:

  • Individuals
  • Bequests (the giving entity is the estate)
  • Corporations
  • Private foundations
  • Churches
  • Civic organizations
  • Third party events
  • Workplace giving programs
  • Local government agencies
  • State government
  • Federal government

And so forth.

But do you need a separate account in the chart of accounts for each type of entity? Probably not! You’d end up with too many accounts which makes your profit and loss report hard to read. We have even seen accounts created for each individual donor name. Now that’s a lot of accounts!

Instead of setting up so many accounts, you can use items to keep track of the types of donors who give to your organization. (The term “items” is used in QuickBooks Desktop while QuickBooks Online calls the same thing “products/services.”)

By Giving Level

One of our clients with a knack for raising money wanted to organize the income accounts for her organization by donor giving level. For example, one account is called “Large Grants & Individual Gifts $1000+ while another account is called “Small Grants & Individual Gifts Less than $1000.” This breakout allows her to easily see income from major gifts vs. small donors.

Since nearly all of the contribution income for this organization comes from private sources, their audited statement of activities uses one account called simply “Contributions.” They have one substantial donor, a private foundation, disclosed in the notes to their audited financial statements. But you cannot differentiate foundation grants from individual, corporate or other contribution sources on the face of their QuickBooks profit and loss report.

By Net Asset Class

Auditors love this one. As part of an audit, they need to determine the increases to temporarily restricted net assets (TRNA) as well as decreases during the year. One major component of TRNA comes from restricted gifts and grants. If all temporarily restricted gifts and grants are posted to an account called Temporarily Restricted Contributions, and if all endowment gifts go to an account for Endowment Gifts (permanently restricted net assets), then it makes it easy for the auditors to find support for the increases in net assets with donor restrictions.

We have also seen clients use income accounts to track gifts restricted for specific temporarily restricted funds, such as gifts restricted for a particular program. This approach does not solve the problem of tracking the related expenditures, though, so we don’t generally recommend it.

Having an income account for restricted gifts and grants does not alleviate the need to track the income as well as expenses for each specific grant or pool of funds restricted as to purpose. We think information to satisfy the auditors can come from good accounting at the level of each restricted fund maintained by the organization, making accounts to distinguish gifts by net asset class unnecessary.

To Wrap Up

Whatever accounts you choose to use, generally it’s a good idea to distinguish your major sources and types of contribution income. For example, distinguish local government grant income from private contributions. Avoid using accounts that are too detailed, such as accounts for individual donors or for minor sources of income.

On the horizon — we are developing a course to help you with tracking restricted gifts and grants using QuickBooks Online and QuickBooks Desktop software. Hang on, we are working on it as fast as we can!

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