financial accounting dave ludwick, p.eng, mba, pmp module 9 managing donations and pledges

Financial AccountingDave Ludwick, P.Eng, MBA, PMP

Module 9 Managing

Donations and Pledges


There are several sources of income• In the previous module, we learned that there were several

sources of income for an agency

• Sources of cash inflows– Government grants

– Donations and pledges

– Fees for services

– Endowment interest

• In this module we will specifically look at the implications of donations and pledges

• Donation is a gift paid on the spot

• Pledge is a promise to pay a gift in the future


Pledges Receivable• Any receivable is an amount due from another party (donor,

endowment fund, government)

• Common examples are:– Pledges Receivable – amounts due from donors

– Grants Receivable – amounts due from government as a result of contracts

– Interest Receivable – amounts due as a result of investment

Date Account Titles and explanation PR Debit Credit

Jul 3 Pledges Receivable 2000

Pledges Income 2000

July 15 Cash 2000

Pledges Receivable 2000


Valuing Receivables• But, not all donors will pay their pledges.

– Some people forget, some over commit, or things change and they can’t pay the money they once thought they could pay

– Therefore, agencies need to make allowance for a certain percentage of pledges which never materialize into actual payments

– We call these pledges Bad Debt (Offerings)

– So, why do agencies accept pledges in the first place?• A pledge is a commitment to make a donation in the future

• It allows someone to offer a gift even if they can’t pay on the spot

• Thus, pledges are a vehicle to stimulate gifts. It allows people to give who may not otherwise be able to give

• The cost of pledges (a few donors who don’t pay), is likely smaller than the benefits (gifts that otherwise may not be given)


Valuing Receivables• How do we account for Bad Debt (Bad Offerings)

– First, we need to estimate the amount we should expect not to be paid (based on historical patterns)

• We must estimate because – we will need to apply an expense caused by bad debt in the current

accounting period (remember, the matching principles says you need to match expenses in the same period as the revenues they helped to generate

– And, we actually don’t know which giver won’t pay yet and we won’t know until we know (you know what I mean)

• Once we have an amount, we will create an AR “contra-account”

• A contra-account reduces an account to provide a more conservative position (an allowance for doubtful accounts)


Estimating Bad Debt Expense• There are many ways to estimate bad pledges but we’ll talk

about Aging Pledges Receivable– The older a receivable is, generally the less likely it will be collected.

– An Aging Analysis groups receivables by age (1-30 days, 30-60 days, 60+ days, as an example), then applies different %ages to different groups to estimate Bad Debt

– Again, we make the adjustment considering the opening balance and the required outcome (We’ll see this by example in a minute)


Example

Donor Name

Donation Not Yet Due

1 to 30 Days Past

31 to 60 Days Past

61 to 90 Days Past

Alton Inc 1200 $1000 $200

J. Firby 900 $400 $500

K. Parker 400 $100 $300

Total 2500

% Uncollectible

0% 4% 12% 25%

Estimated Uncollectible

0 $56 $60 $125


Recording Estimated Bad Debt• As mentioned earlier, we will create a sub-account for each

customer who buys on credit

• We’ll also create an AR “contra-account” where we can store allowances for doubtful accounts. This contra-account is not named to any one donor as we do not know yet which donor will default on their credit– The Bad Debt expense account is just like any other expense account

– The “Allowance” account is the contra-account. It would be illustrated on the Balance Sheet as shown next…


July 3 Bad Debt Expense 241

Allowance for Doubtful Accts 241


Recording Estimated Bad Debt• Notice how the AR account itself is untouched in the

previous journal entry– The T-accounts look like this

Pledges Receivable Pledges Income

Dec 31 2500 2500 Dec 31

Bad Debt/Offering Expense Allowance for Doubtful Accts

Dec 31 241 241 Dec 31


Allowance for Doubtful Accounts• The Allowance for Doubtful Accounts account is shown

against the AR account– To avoid overstating assets, this contra-account reduces AR to

reflect an amount that can be expected to be collected

Statement of Financial Position

Current Assets

Cash 1000

Current Liabilities

AP 750

Pledges Receivable 2500 Wages 1500

Less: Allowance for

Doubtful Accts

241 2259

Supplies 10000 Accumulated Surplus 11009

Total Assets 13259


Allowance for Doubtful Accounts• The Bad Debt Expense account is shown against the

Revenue for the period– The Bad Debt Expense account reduces the revenue by the same

amount that the contra-account reduces AR

Statement of Activities

Pledges Income

Expenses

Bad Debt Expense

Net Income

2500

241

1980


Writing off Bad Debt• So lets say our donor defaulted on the payment for a

pledge:– We would write down a specific pledges receivable account

– This will write down the overall AR account in the GL

– And reduce the remaining Allowance for Doubtful Accounts

• The Balance Sheet now looks like…


Dec 31 Allowance for Doubtful Accts 2

AR – Firby 2


Writing off Bad Debt• After writing down the Firby Pledges Receivable

subledger account, we notice that the Net AR account (AR less Allowance for Doubtful Accts) is not changed– That’s because we already allowed for the doubtful account

Balance Sheet

Current Assets

Cash 1000

Current Liabilities

AP 750

Pledges Receivable 2498 Wages 1500

Less: Allowance for

Doubtful Accts

239 2259

Supplies 10000 Accumulated Surplus 11009

Total Assets 13259


Recovering Bad Debt• So we assumed a customer would not pay, so we wrote down his

account

• But now he has come back and paid, at least partly.

• The transactions are simply the reverse of the write down:– First, restore the Allowance and the AR subledger

– Then take the cash and run


Aug 31 Pledges Receivable – Firby 2

Allowance for Doubtful Accts 2

Aug 31 Cash 2

Pledges Rec – Firby 2

financial accounting dave ludwick, p.eng, mba, pmp module 9 managing donations and pledges

Documents