When donations are given to an organization, usually a nonprofit entity, those donations have a "worth" and must be counted as an asset for the company.The value of assets that have been donated is usually based on how much it would cost to buy them.The assets of nonprofit organizations come under more scrutiny by the IRS than do other organizations, so it's important that organizations are aware of how to post these contributions in their financial books.You can easily record the receipt of donated items by following a few simple accounting rules and knowing how to determine specific values of items.
Step 1: Understand how fair market value is defined.
According to GAAP, fair market value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.If you turn around and sell them immediately, you should record the value of the assets that you donated.This is referred to as the exit price.
Step 2: Determine the exit price by researching the market.
The donor used to specify a value for the donated asset.Modern accounting standards require that the organization determine a value for the asset based on prices of similar assets.The market prices of items identical or very similar to those given to your organization are what you'll have to look for.Market research of prices should be based on where you can sell the items.If a donor gives one chair, you should value it at its market price at the furniture store.If 100 chairs are donated, you should value them at their wholesale price.Any items received in bulk are the same.
Step 3: There is a fair market value.
You can estimate the value of an item if you can't find a similar item in the market.It is useful for large assets.If you want to estimate the value of your asset, research the market to find similar assets.This is allowed by GAAP, but not as strongly as finding an identical asset to compare to.It's unlikely that you would be able to find an identical building if you received a building from a donor.If you want to estimate a price for your building, you should research the price per square foot of similar buildings nearby or in similar locations.IRS publication 561 is a guideline for estimating the value of donated property.You can find the publication here.
Step 4: Use a donor-supplied price to value the asset.
It is acceptable to use the fair value given by the donor if you can't find similar assets or values.The donor will have recorded the donation in their own books, so ask them for the amount.Sometimes there's no way around this method, which is the least preferred of the three valuation methods provided by GAAP.If the item is over $5,000 in value, it is advisable to have it assessed by a professional.
Step 5: Determine if the transaction is a contribution or an exchange.
Even though we may think of contributions and exchanges as donations, accounting principles treat them differently.A contribution is defined as "unconditional", meaning that the donor doesn't get anything in return for their donation.A gift in exchange for donation is called an exchange.Later in the transaction, the type defined here will be important.A donor makes a donation to a concert.The $1000 is recorded as a contribution if they don't get anything in return.Part or all of the donation should be recorded as an exchange if they receive a number of tickets to the concert.Imagine the donor gets 50 tickets for their donation, each with a fair market value of $20This would be recorded as an exchange because the benefits are equal to the donation.Half of the donation would be recorded as an exchange and the other half as a contribution if the donor received 25 tickets.
Step 6: If multiple organizations are involved, record the transaction correctly.
items donated to a charity may be passed on to other charities or organizations on their way to their final destinationIt makes sense for every middle-man to report the items they transfer through them.The charity that uses the item or gives it to those in need should record the transaction.If you pass assets through to another organization, you should only record your expenses, not the value of the assets.If a "middle-man" organization makes a significant improvement or change to the asset, there is an exception to this rule.This can be anything from organizing and repackaging wholesale items to restoring furniture.The fair market value of assets can be recognized by the organization doing the improvement.
Step 7: Determine if or not to record donated services.
Services that are donated are not recorded as assets.While you should record donations of items like toys and clothing, you wouldn't necessarily record donated services or use of facilities.The services must be recorded if they meet certain conditions.Require specialized skills and would usually need to be purchased if they weren't donated are some of the requirements.The same way as donated assets will be used to record these types services.
Step 8: The recording process is basic.
The market value obtained earlier in the process is used to record this transaction.Recording a donated asset requires two entries.Use the following entries for a generalized donated asset transaction.Credit "contribution revenue" for a for-profit company or a nonprofit company.
Step 9: A recording of an exchange.
The standard way of recording a contribution is still used if the donation is in whole or in part.Depending on the type of exchange, the amount should be recorded differently.It would be recorded the same way as a sale.In the concert ticket example, the transfer of $1000 worth of tickets for the $1000 cash donation would be recorded as a debit to the cash account and a credit to revenues.
Step 10: If assets are passed to another organization, record the transaction.
If you are a "middle-man" organization that doesn't receive donations directly from donors or give the assets out to their intended recipients, you must record the transaction differently.You would record the expenses incurred in transporting the assets and the contributions as follows: Debit the market value amount under "expense."Under "Unrestricted Contributions" you can credit the market value amount.