If you are a small non-profit organization in Canada, you need to record donations and contributions accurately. Having proper documentation ensures that you are following all the tax-related laws and enhances transparency and accountability. However, many nonprofits struggle to maintain accurate records due to a lack of resources, knowledge, or time.
Not having up-to-date financial records can result in missed tax deductions, denied grants, or problems with the Canada Revenue Agency (CRA). This is where hiring professional tax help for small businesses can help. As the owner of a non-profit in Canada, you have certain specific responsibilities. Failing to follow these rules can risk the organization’s status and operations.
Hiring a tax expert allows you to receive advice on how to manage your donations best. Such experts can even help you set up accounting systems that meet your organization’s unique needs. And if you face any issues during audits or CRA reviews, you can have peace of mind and focus on your organization’s core operations.
How to record donations?
To record different kinds of donations properly, various structured methods are to be used. They are as follows:
Monetary donations
When you receive a monetary donation, it should be recorded as revenue in the accounting system. This means increasing (debiting) the cash or bank account and recording (crediting) the donation in the donations revenue account.
Moreover, it is also important to categorize the donations properly. For example, does the donation have to be used for specific purposes only (restricted), or is it to be used freely by the organization (unrestricted)?
In-kind donations
Non-cash or in-kind donations include goods and services. It is important to assess the value of these donations at a fair market value, which is the price one would typically pay for them in the market. In-kind donations should also have a separate revenue account designated only for in-kind donations.
For example, if a non-profit receives donated services, like accounting or legal assistance, it should be recorded as both revenue and expense, as the organization benefits from the service. This ensures that an accurate value of the resources used by the organization is reflected.
Pledge donations
A pledge is a commitment to donate a specific amount in the future. When a pledge is made, it should be recorded as a promise receivable, recognizing the future income. This involves debiting the pledge receivable account and crediting the contributions receivable account.
Once the pledge donation has been received, the organization should reverse the pledge receivable entry and record the donation as revenue. This helps differentiate between promised donations and actual cash inflows, keeping things transparent.
How to accurately issue donation receipts for donors
A key part of ensuring that tax season goes smoothly is issuing proper donation receipts for the donors. This helps donors claim tax deductions. Every receipt should have the following details:
- Name of the organization
- Name of the donor
- Date of the contribution
- Amount of cash contribution
- Description of non-cash contributions
- Statement regarding goods or services
Common mistakes to avoid
There are certain common mistakes to avoid when dealing with recording donations and contributions.
- Mixing restricted and unrestricted funds.
One of the common errors is mixing restricted and unrestricted funds. It is recommended to use separate accounts or categories for them to avoid this. Restricted funds are allocated for specific purposes, while unrestricted ones do not have a specific use.
- Under-reporting in-kind contributions.
Failing to report in-kind contributions can mislead stakeholders by understating revenue and expenses. This damages credibility and triggers audits. You must accurately document these donations to comply with GAAP and tax filings, like Form 990, and avoid penalties.
Start accurate donation recording today!
If you own a non-profit organization, knowing how to record donations accurately is paramount for success. Consult with tax experts today!
