Donations accounting

Accounting for donor grants

(Not including individuals’ or minor donations which are unrestricted and have no reporting requirements)

Donor grants can have features which need appropriate handling:

  • Apportionment of the grant to a specific period
    • Often the donor’s financial year, which may entail splitting the grant to align with your FY.
  • Restriction to a purpose, project, or type of expenditure
  • Payment of a grant to you on behalf of a partner organisation.

For details of Xero entries related to incoming payments of grants, also read the section “Reconciling money coming in”.

The following does not require unrestricted grants to be tracked by donor. But if you want reports by donor to include unrestricted grants, then you will need to track those grants too. (You will almost certainly need to distinguish restricted grants from unrestricted.)

Invoicing

Sometimes donors will request an invoice. In these cases, you should create an appropriate invoice (see below for relevant coding). Ensure that the invoice creation date was not before the earliest date that you want to recognise the revenue. If the invoice is intended to cover a period that extends beyond your financial year end, then as a minimum ensure that the period to be covered is noted with the invoice. Preferably, create 2 lines in the invoice, splitting the value of the invoice into 260 Grants for income related to the current financial year and 810 – Income in advance for income related to the next year. Note that accounting codes and their descriptions do not appear in the invoice generated for external use by Xero. [Someone with Advisor status and OK with Manual Journals will convert the income in advance into income in the next financial year.]

It may also be useful to create internal invoices in other cases. The benefit is for tracking payments against money that is due to us in a given period.  An example would be when the donor is contracted to pay, say, £10000 but pays us in instalments. Where the donor expects invoices from us, do NOT create additional internal invoices. This is liable to lead to confusion, for example if an internal invoice gets sent to the donor.

If a donor is only really committed when they actually pay us and the first payment is their total commitment, then there is not a lot of point in creating an invoice.

Do not allocate a payment against an invoice dated in the future or an invoice to be created in the future. This messes with the transparency of the accounts. You need instead to create a Receive Money Prepayment transaction. Code this to 810 – Income in advance. Allow the system to create a related “Invoice number”, and allocate Donor/Restricted coding as normal. (See guidance in “Reconciling Money coming in” section for step by step instructions. There is also be guidance on matching this to an invoice when the time comes for that: https://central.xero.com/s/article/Apply-a-prepayment-to-a-sales-invoice .)

Unrestricted, not time limited grants

To be entered when received as 260 Grants unless there is a mutual understanding that the funds are intended for the next FY, in which case code as 810 – Income in advance.

Splitting a large unrestricted grant between financial years should on the whole be avoided. Consult with Treasurer/Finance administrator if inclined to do this. If you have a large grant that you want to recognise over 2 years, then you should have the donor agree to doing this and to the split in question. You then have the evidence to support the time period restriction and this then falls into the category of a time limited grant.

If the donor requested an invoice, then create one with the coding indicated above, before reconciling the transaction. The payment transaction should then be matched to the invoice.

Unrestricted, time limited grants

Since these are unrestricted, we assume that these are always fully spent in the intended time period.

If the donor requested an invoice, then create one with the coding 260 Grants, before reconciling the transaction. The payment transaction should then be matched to the invoice.

If the invoice value is covering a period which crosses our FY end, then create 2 lines in the invoice, splitting the value of the invoice into 260 Grants for income related to the current financial year and 810 – Income in advance for income related to the next year.

If no invoice is requested by the donor, then create an internal invoice dated the start of the period with a value equal to the grant covering the remainder of the your FY. If the committed grant is not then fully spent, create a second invoice dated the start of the next FY for the amount intended for that year. Likewise for any further years.

All lines in these invoices should be coded 260 Grants but it is thus important that the invoice date puts the income in the correct FY.

Payments received should be matched against the invoices created, by default starting with the earliest dated unpaid invoice. Note, though, the earlier advice about not matching payments to future-dated invoices.

Payment to you on behalf of a partner

Either on the invoice or on receiving the money (absent an invoice or reason for one), enter the gross value of grant as 260 Grants.

Create a bill with the partner organization as customer, with the value due to the partner, coded as 310 Partner grants. Payment to the partner should be matched to this bill.

If the grant is Restricted or related to a project, remember to appropriately code not only the incoming grant but also the payment to the partner so that the payment shows on a project report.

Restricted purpose grant

For a one off grant or a series of grants from a donor where there is no need to report separately on each tranche, use (if necessary create) a single donor/project name. The donor name makes sense as the name to use.

If the donor makes different grants which either have to be reported on separately or have different restrictions, then create and use a project name for each such grant (e.g. Lottery #2, Lottery #3).

Follow the procedures as indicated earlier as regards invoicing, invoice values per financial year, and coding as 260 – Grant income. In addition allocate the income line to the relevant project name in the Donor/project column and to Restricted in the Funding type column. See the section “Project Tracking” for how to set up and use the related tracking codes.

If the grant is not time restricted and not all spent by year end, then the difference is shown as a surplus and is added to “Reserves” for that donor in the accounts. The surplus can be seen in a report such I show at “Active Project YTD actuals report” and the cumulative reserve in the Balance Sheet with project filter applied.

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