Accounting for Donations to Nonprofit Organizations: 6 Rules

Rule 2: A matching gift is not revenue until the match happens

“We’ll give you $10,000 if you raise $10,000 by June” feels like money in the bank. It isn’t yet. A gift is conditional when the agreement has both a barrier the nonprofit must overcome and a right for the donor to take the money back, or not pay it, if the barrier is missed.

Think of it as a gym that promises a refund if you attend thirty classes. Until class thirty, the refund is a hope with a punch card.

• Barriers that count. A matching requirement, a measurable level of service (serve 500 families), or a specific outcome.
• Things that don’t count. Routine reporting, a requirement to send an annual update, or ordinary compliance. Those are paperwork, not barriers, and the gift is unconditional.
• If cash arrives early. Record it as a refundable advance, which is a liability, and move it to revenue when the barrier is met.
• Conditional is not the same as restricted. “Use this for the new van” is a restriction: it is revenue now, just earmarked. “We’ll pay for the van once you raise half” is a condition: it is not revenue yet.

Rule 4: Donated stuff goes on the books at fair value

Gifts of things — food, furniture, a laptop, office space, the treadmill — are recorded as contribution revenue at their fair value on the day you receive them, with the other side going to inventory, equipment or an expense, depending on what you do with it. Fair value means what it would cost to buy the same thing in its current condition, not what the donor paid and not what the donor feels it was worth emotionally.

That last distinction matters more than you’d think. Every donated sofa is, in the donor’s memory, the sofa from the showroom. Your books need the sofa from the curb.

• Show it separately. Since FASB’s 2020 update on contributed nonfinancial assets, GAAP statements show these gifts on their own line, apart from cash gifts, with notes on what kind of items they were, whether you used or sold them, and how you valued them. The update changed presentation, not when or how you record them.
• Keep the evidence. A screenshot of comparable listings, a price list or a weight and a per-pound value for food is enough to show your number did not come out of thin air.
• Selling donated property has a form attached. If you sell certain donated property within three years, the IRS expects you to file Form 8282 and give the donor a copy. Larger organizations that file Form 990 may also report noncash gifts on Schedule M.
• Donated securities are not in-kind. Stock is a financial asset and is usually sold quickly, so it is recorded like cash at its fair value on the day received.

Rule 6: The receipt is a tax document, not a thank-you card

The warm letter with a photo of smiling volunteers is lovely. The IRS is interested in three sentences of it. For any single contribution of $250 or more, the donor needs a written acknowledgment to claim the deduction, and the IRS says the donor is responsible for obtaining it, generally by the time they file their return. In practice, donors expect the charity to send it, so send it.

• What it must say. Your organization’s name; the amount of a cash gift, or a description, not a value, of a noncash gift; and whether you gave anything in return. If you did, a description and a good faith estimate of its value. If you gave nothing, say so.
• Don’t value the treadmill on the receipt. You describe the item. Putting a dollar figure on a donor’s noncash gift is their job for their tax return, even though you still need your own fair value for your books.
• Gala tickets and auction wins need a second disclosure. When a donor pays more than $75 and gets something back, you must tell them in writing that only the amount above the value of what they received is deductible, with a good faith estimate of that value. A $150 dinner ticket with a $60 meal is a $90 gift, not a $150 one.
• No format is prescribed. A letter, an email or a year-end statement listing each gift all work, as long as the required facts are in it.

Here is the part where an accounting firm is supposed to say you need an accounting firm. Often you don’t. A small congregation or club that takes cash and checks, has no pledges, no grants with conditions and no gala can run all six rules from decent donor software and a careful volunteer. Where we earn our fee is the mix: multi-year pledges, matching grants, donated property and an audit on the horizon. Our bookkeeping and accounting services cover that, and the flat monthly pricing is published, so you can decide before talking to anyone. If you are still learning the vocabulary, our plain-English bookkeeping terms list is a gentler place to start.

Frequently asked questions

How do you record donations in nonprofit accounting?

Record a cash donation as contribution revenue when it is received, and an unconditional pledge as contribution revenue and a pledge receivable when the promise is made. Classify each gift as with or without donor restrictions at that moment. Gifts of goods are recorded at fair value, and gifts with a barrier and a right of return are not recorded as revenue until the barrier is met.

Are donations considered revenue for a nonprofit?

Yes. Under U.S. GAAP for not-for-profits, unconditional donations are reported as contribution revenue in the statement of activities, split between net assets with donor restrictions and net assets without donor restrictions. They are not treated as loans or as deferred income, unless the gift is conditional.

What is the journal entry for a pledge to a nonprofit?

For an unconditional pledge, debit pledges receivable and credit contribution revenue, in the restricted or unrestricted column as the donor specified. When the cash arrives, debit cash and credit pledges receivable. Pledges payable over more than one year are generally recorded at their present value.

How do you account for in-kind donations?

Record donated goods as an asset or expense and as contribution revenue at their fair value on the date received. Contributed nonfinancial assets are shown as a separate line from cash gifts in the statement of activities, with disclosures about how they were used and valued. Gifts of time follow separate, narrower rules.

Do you record volunteer hours as donations?

Usually not. Contributed services are recognized only if they create or enhance a nonfinancial asset, or if they require specialized skills, are provided by people with those skills, and would otherwise have to be purchased. A volunteer accountant doing your books qualifies; a volunteer serving soup generally does not.

Does a nonprofit have to give a receipt for donations?

For a single contribution of $250 or more, the donor needs a written acknowledgment from the charity to claim a deduction, and the IRS says the donor is responsible for obtaining it. It must state the amount of cash or describe any noncash gift, and say whether the charity provided goods or services in return. Separately, a charity that receives a payment of more than $75 that is partly a gift and partly for goods or services must give a written disclosure.

What is the penalty for not giving a quid pro quo disclosure?

The IRS penalty is $10 per contribution, up to $5,000 per fundraising event or mailing. The charity can avoid it by showing reasonable cause for the failure.

What is the difference between restricted and unrestricted donations?

A restricted donation can only be used for the purpose or time period the donor specified, such as a building fund. An unrestricted donation can be used for any purpose within the mission. When the restriction is met, the amount is reclassified from net assets with donor restrictions to net assets without donor restrictions.