Nonprofit Income Accounts: Special Events Part II
Last week we laid out a simple accounting framework for special events:
Special Events (parent account, not for data entry)
– Special Event Income (sub account of Special Events)
– Special Event Direct Costs (sub account of Special Events)
The above framework accounts for all special event income in the Special Event Income account and all event expenses in the Special Event Direct Costs account. This approach allows you to quickly answer the question, “How much did we make?” It also goes a long ways towards helping with information needed for audit purposes and Form 990 reporting.
But as we said in our last post, using only two accounts can be an oversimplification. Even if you only use these two accounts, it’s important to understand the different types of special event income and expenses.
Types of Special Event Income
Special event income falls into two broad categories:
- Exchange transactions
There are several reasons this distinction is important:
- Only contributions are tax deductible by donors, not the amount paid in exchange for goods and services received. You must provide accurate donor receipts or other acknowledgements for tax purposes that clearly reflect the contribution portion.
- On Form 990, contributions are reported separately from exchange transactions.
- For audit purposes, special event contributions may be reported with other contributions or grouped with special event income.
- For management purposes, it’s helpful to know how much you brought in from contributions vs. exchange transactions.
Event Income from Contributions
Contributions come in various forms:
- Pledges and other gifts made at the event
- The contribution portion of the ticket price
- In kind donations such as food, free or discounted use of a venue, volunteers who provide entertainment, and silent auction items
Event Income from Exchange Transactions
Income from exchange transactions includes:
- The exchange portion of the ticket price
- Sales of merchandise such as T-shirts
- Silent auction sales (exchange income to the donor and for Form 990 purposes, adjustment to contribution income for Generally Accepted Accounting Principles)
- Other payments for goods or services at the event
Example of Ticket Sales
As an example, say an event attendee pays $100 for a ticket. $40 of the ticket price covers the fair market value of the dinner and entertainment. The other $60 is a contribution.
In accounting lingo, the value of the dinner and entertainment is called “direct benefits to donors.” The $40 fair market value is based on what it would cost for a comparable meal and entertainment. The value is not dependent on the amount the organization paid. Even if all the food and entertainment was donated, there is still a value to the donor.
Types of Special Event Expenses
Expenses also fall into two broad categories:
- Direct benefits to donors
- Fundraising expenses
Direct benefits to donors include things like
- Facility rental costs
- Door prizes
Fundraising expenses include
- Advertising and promotion of the event
- Printing costs for tickets
- Fees paid to fundraising consultants
Why Are Event Expense Categories Important?
The reason the distinction between direct benefits to donors and fundraising expenses is important is because direct benefits to donors are presented for Form 990 and audit purposes as a reduction of special event income, similar to cost of goods sold. Event fundraising expenses, on the other hand, are included with other fundraising expenses. Expenses classified as direct benefits to donors reduce the amount of fundraising expenses reported in Form 990 and in audited financial statements.
We have seen Form 990 distorted when organizations included direct benefits to donors as fundraising expenses. This mistake can greatly inflate fundraising expense and make the organization look inefficient. Remember donors want to see low fundraising (and management and general) expenses compared to program expenses. If direct benefits to donors is a minor cost, then it is O.K. to include with fundraising expenses.
So Now We Need More Accounts?
Do you need multiple accounts to separate contributions from exchange transactions and direct benefits to donors from fundraising expenses? Fortunately, no! Using two accounts is often still adequate. You can track the different types of special event income using items in QuickBooks desktop software (the same thing is called a “product/service” in QuickBooks Online). Items are used with sales receipts and invoices. Multiple items can feed into the same account. Therefore reports by item can break down the detail of Special Event Income leaving your profit and loss report easier to read.
For expenses, it may not be hard to manually separate direct benefits to donors from fundraising expenses if you export the Special Events Direct Costs transaction detail to Excel. Or you may want to set up separate Direct Cost accounts for the major types of event expenses. The latter approach is useful if you wish to budget by event line item in QuickBooks.
You can use items for expenses as well (“two-sided item”), but we normally do not recommend this approach for fundraising direct costs. It’s a different work flow than entering expenses the usual way; as a result people forget to use the item. Also it adds a layer of complexity to the bookkeeping process. It’s an option, but we’ve found keeping data entry simple is generally better.
Recording in-kind donations could be a separate post, so we won’t dive into it here. We’ll simply say that here is one case where keeping a list of in-kind donations in Excel may be the easiest solution.
There you have it – a simple framework for accounting for special events. Just in time for the fall fundraising season!