Jennifer writes: “ My organization has started a new business campaign to raise funds from local businesses. Some of the businesses have responded with a promise to pay a certain amount by the end of the year, some cross over the fiscal year, and some will provide in kind support this year and next. The Executive Director wants the total amounts recorded on the date they are promised, of course. I have treated most as if they are pledges from individuals, but the in kind support seems trickier, especially using an invoice through Quickbooks. Any guidance would be greatly appreciated.”
This is a good example of how a request that probably seems simple to the person making it – in this case the executive director – raises multiple issues for the accountant. Let’s break it down:
The first issue is whether the organization has a policy of reporting interim financial position and results according to GAAP. I always recommend organizations do this because GAAP is a complete and integrated system of standards, widely understood and recognized. It helps ensure consistency in accounting and reporting from month to month as well as across organizations.
Requirements of a recordable promise?
Assuming an organization uses the GAAP standard, let’s consider the question of whether pledges from businesses should be recorded. If the amount is known, the promise is unconditional, and there is a legal right to receive what was promised, then you can record a pledge receivable – as long as there is sufficient documentation of the promise. That generally means a letter, an email, or some other form of written communication. Verbal notification from the ED or even from the donor is not enough.
Does timing matter?
Whether you expect to receive payment of a pledge in this fiscal year or the next one doesn’t matter. The same
is true for a pledge of services or items.
Individual or business?
Let’s look at Jennifer’s decision to record most of these pledges as from individuals rather than businesses. In my experience, donors who own small businesses make pledges as individuals and pay them on business check stock, and vica-versa. This can create difficulties in matching a check received to the pledge it’s intended to pay. At the time the pledge is made, you probably don’t know for sure which entity will pay it, so record these pledges using both. Set up the business as the donor/customer and use the individual as the contact so both are associated with the QuickBooks invoice.
Do you need an allowance?
Look at outstanding pledges as part of each month-end closing process. How much of the balance do you expect to collect? Anything less than 100% should be set up as an Allowance for Uncollectable Pledges, a contra-receivable account that is adjusted through a bad debt expense account.
Jennifer’s question gave the impression that the ED is interested in recording pledges whether or not they meet the GAAP standard. She might feel pressured to overstate revenue. This not a pleasant spot to be stuck. Try to explain GAAP standards to the ED and offer to keep track of pledges in another way, outside of the accounting system. If there is still insistence on recording them in QuickBooks, you can try raising the Allowance for Uncollectible Pledges so that the net receivable is an amount you think is reasonable.
One more note: amounts pleged more than a year out may need to be discounted so the receivable balance in your books states the present value. This isn’t an issue until the difference between present and pledged value is large enough to have a material effect on the financial statements.