Receive non-cash donation of credit and apply to future bill

I recently encountered this scenario and, given its complexities, wanted to share the solution.

An occasional situation for nonprofit organizations is receipt of donations that include a non-cash donation of credit against a future bill.  One example might be an event center that provides a credit that may be applied against a future event that it hosts or caters.  In this situation, the nonprofit would like to meet the following objectives in recording this complete set of transactions.

Objectives

• Invoice the donor.
• “Receive” the donation by applying credit to future bill.
• Close the invoice.
• Capture the non-cash donation in Quickbooks as an in-kind donation.
• Capture the full expense, excluding application of credit, to an appropriate expense account.
• After applying credit, make payment of the net amount to the billing organization (which happens to be the same organization that donated the credit).

Complexities of this situation

• The organization is both a customer (for the donation of future credit) and a vendor (for the bill).  This presents a difficulty because the non-cash donation of credit must somehow be received from the donor organization and applied to the bill from the vendor organization, which, in reality are one and the same, but in Quickbooks are treated as different entities.
• Receipt of the donation and closure of the donor invoice requires receipt of the non-cash donation into a bank account. Banks deal with real cash transactions, not non-cash transactions.

Key elements of solution

The preferred approach to meeting these objectives entails receipt of the non-cash donation of credit from the invoice into a Clearing Account, to a Vendor Credit memo, and then applied to a Bill, which is paid, net of applied credit, from a preferred bank account.  Several key elements are required for this approach.

• The donor organization must be set up as two separate entities, one as a customer, and the other as a vendor.  Quickbooks is explicit about the types of transactions that can apply to each type, and this approach requires both.  For purposes of this discussion, we’ll call them “Entity A – Customer” and “Entity A – Vendor.”
• To keep cash and non-cash donations separate, use of a special revenue account for non-cash donations is highly recommended, typically named something like In-Kind Donations.
• The Invoice needs to reference a product or service that applies to the non-cash donation of credit.  If nothing applicable already exists, then a new Service, called something like In-Kind Donation of Credit, must be established.
• The non-cash donation of credit needs to be received from the Invoice into a bank account of some sort.  Use of a Clearing Account is preferred, as it is specifically intended for transactions resulting in temporary, non-zero balances.  This keeps the non-cash donation separate from any cash donations, and avoids the need for dummy transactions in real bank accounts. It also frees up the non-cash donation from “Entity A – Customer” for application against the bill from “Entity A – Vendor.”  Finally, receipt of the non-cash donation of credit allows the Invoice to be closed.
• A Bill from “Entity A – Vendor” should reflect the full expense of the bill owed to the external organization, excluding application of the non-cash donation of credit.
• A Vendor Credit memo, in the name of “Entity A – Vendor,” is required for application against the Billfrom “Entity A – Vendor.”  It is also important that the Vendor Credit memo tie back to the Clearing Account as its source of funds.

With these elements in place, the Bill may be paid, net of non-cash donation of credit, from another, “real” bank account, and all above-stated objectives will be met.  Shown below are the details for each step.

Solution

• Create Customer and Vendor entities for “Entity A.”
  • From the + New menu, select Add customer, complete the form (e.g., “Entity A – Customer”), then click Save.
  • From the + New menu, select Add vendor, complete the form (e.g., “Entity A – Vendor”), then click Save.
• Create In-Kind Donations account if it, or something similar, does not exist.
  • Click the Gear icon and then select Chart of accounts.
  • Review Chart of accounts for In-Kind Donations or similarly named account.
    • Account Type should be Revenue.
    • Detail Type should be Non-Profit Revenue.
    • Make this a subaccount should be checked.
    • Parent account should be Direct Public Support.
  • If account does not exist, click New, enter information as described above, then click Save.
• Create new Service item for In-Kind Donation of Credit.
  • Go to Sales, then select Products & services.
  • Select New.
  • Select Service.
  • In the Name field, enter In-Kind Donation of Credit or something similar.
  • In the Income account field, enter Direct Public Support: In-Kind Donations.
  • Click Save and close.
• Create Invoice to customer.
  • From the + New menu, select Pledge to bring up the Invoice form.
  • In the Add customer field, select the customer name (e.g., “Entity A – Customer”).
  • In the Product / Service field, select In-Kind Donation.
  • In the Amount field, enter the dollar value of the non-cash donation of credit.
  • Enter appropriate information in other fields, as desired, and then click Save and Close.
• Create Clearing Account.
  • Click the Gear icon and then select Chart of accounts.
  • Review the Chart of Accounts for existing Clearing Account.  If there is no such account, create one as follows:
    • Click New.
    • In the Account name field, enter “Clearing Account.”
    • In the Account type field, select “Bank.”
    • In the Detail type field, select “Checking.”
    • Do not enter an opening balance.
    • Click on Save.
• Create Bill from vendor.
  • From the + New menu, select Bill to bring up the Bill form.
  • In the Vendor field, select “Entity A – Vendor.”
  • In the Category field, select the appropriate expense account, which is that account where you want the full Bill amount to appear.
  • In the Amount field, enter the full amount of the Bill, excluding application of the non-cash donation of credit.
  • Complete the rest of the form as appropriate.
  • Click Save and close.
• Receive Payment from customer.
  • From the + New menu, select Receive Payment to bring up the Receive Payment form.
  • In the Customer field, select “Entity A – Customer.”  This should bring up the open Invoice with the non-cash donation of credit.
  • In the Deposit To field, enter Clearing Account.
  • In the Amount received field, enter the smaller of the following:
    • The full amount of the non-cash donation of credit.  This will result in closure of the open Invoice.
    • The full amount of the Bill.  If the Bill is less than the full amount of the non-cash donation of credit, then the Invoice will remain open, as partially paid, with a reduced amount of non-cash donation of credit outstanding.  The advantage of not using the entire amount of the non-cash donation of credit, when the Bill is a small amount, is that the excess amount does not remain in the Clearing Account, which should only temporarily be non-zero while transactions are being finalized.  This may be handled other ways, but that is beyond the scope of this article.
  • Complete the rest of the form as appropriate.
  • Click Save and close.
• Create Vendor Credit memo.
  • From the + New menu, select Vendor Credit to bring up the Vendor Credit form.
  • In the Vendor field, select “Entity A – Vendor.”
  • In the Category field, select Clearing Account.
  • In the Amount field, enter the amount of the non-cash donation of credit that was received in payment of the Invoice. Using the same amount here allows the Clearing Account to be returned to zero.
  • In the Description field, enter something like, “In-kind Donation of $XXX to be used against bill from Entity A – Vendor”
  • Complete the rest of the form as appropriate.
  • Click Save and close.
• Apply Vendor Credit and Pay Bill.
  • From the + New menu, select Pay bills to bring up the Bill Payment form.
  • In the Payee field, select “Entity A – Vendor.”
  • In the Bank/Credit account field, select the “real” bank from which you normally issue payments.
  • In the Outstanding Transactions section, select the Bill to be paid and enter the full amount of the Bill into the Payment field.
  • In the Credits section, select the Vendor Credit previously created and enter the full amount of the Vendor Credit.  The value in the Amount field should be the net amount of the bill after applying the Vendor Credit.
  • Complete the rest of the form as appropriate.
  • Click Save and close.

Confirm all objectives have been met

• Invoice is closed, or, if open, then partially paid, with outstanding balance being the unused portion of the non-cash donation of credit.
• In-kind Donations has captured the utilized portion of the non-cash donation of credit.
• Full expense of Bill is captured in appropriate expense category.
• Bill Payment was for net amount of Bill after application of credit, and the associated bank account was reduced by the amount of this payment.
• Clearing Account is zero.
• Accounts Payable is zero.