We’ve reached the end of our three-part series on Nonprofit Accounting Quick Tips, but not before we talk about how to properly record non-cash (in-kind) gifts. It is inevitable that most charitable organizations will receive non-cash contributions at one point or another. Non-cash contributions can take the form of goods, securities, supplies, or services. Properly accounting for the receipt of non-cash contributions is an area where we notice a lot of confusion from a bookkeeping perspective, so let’s dive in to how to manage these gifts correctly.
Step 1: Set up an expense account (or a few)
Before an exempt organization can record the receipt of a non-cash contribution, the proper accounts need to be in place on the organization’s Chart of Accounts, which should include both a revenue and expense account for non-cash contributions. One may ask: if my charitable organization is only receiving non-cash contributions, why do we need to also have a related expense account?
Step 2: Record, record, record
Had those supplies or services not been donated to the organization, the charity would have incurred the expense to purchase those items, and as such, the use of the contributed goods or services needs to be expensed. In addition, when budgeting and forecasting, it is important to include all expenses incurred by the charitable organization, even if there was not a cash outlay. If a charity is processing a high volume of non-cash transactions, it is advisable that a separate non-cash expense account be set up for contributed goods, supplies and services to provide greater transparency into the nature of the charitable organization’s expenses.
Bonus: Determine the value
Recording the contribution of supplies or services is simply a debit to the non-cash expense account and a credit to the non-cash revenue account. Purchases of new supplies by a donor will have a clear fair market value, however, the donation of used items may not. Determining the value of some items may be difficult as the fair market value may not be readily ascertainable. Both accounting standards and the IRS agree that charitable organizations may estimate this value as long as it is done on a reasonable and consistent basis.
The receipt of contributed inventory goods will trigger a slightly different treatment since an inventory account will need to be utilized. Upon receipt of the contributed goods, the charity will need to determine the value of the goods for internal reporting purposes and record a debit to an inventory account and a credit to the non-cash revenue account.
Was this article helpful? Make sure to check out the other articles in this series: Nonprofit Accounting Quick Tip #1 General Tasks & Nonprofit Accounting Quick Tip #2 Segregation of Duties.