7a. Nonprofit Revenue and Transactions

In this part of The Guide, we’re going to learn about revenue in nonprofit bookkeeping. I will first go over a couple things to consider before you get started with revenue entries. Then we’ll look at types of revenue your organization might receive and the specific transactions in QBO that you will use to enter the revenue.

Considerations

Cash vs. Accrual

In some cases, how and when you enter revenue to QBO, depends on whether you use the Cash or Accrual basis of accounting. If your organization has submitted either a 990EZ or 990, then you have already declared an accounting method and you have to continue using what is listed in the 990, unless you file for a change. If you haven’t officially declared a basis yet, now is a good time to make that call so that your entries are consistent.

Cash basis can be a little more intuitive to work in if you don’t have a lot of experience in accounting, but Accrual basis isn’t really that complicated. When it comes to revenue, in Cash basis, you enter the transaction with the date the revenue is received. In Accrual basis, you enter the transaction with the date that the agreement to provide funds was made.

For example, say you signed a grant agreement for a grant of $1000 on January 1st, but you don’t receive the funds until February 15th. In Cash basis, you record a sales receipt for $1000 on February 15th. In Accrual basis, you record a pledge for $1000 on January 1st. There are pros and cons to each method, and what works best for your organization will depend on your unique situation. That being said, accrual is generally considered better suited for growth, so if you start on cash, you might switch to accrual anyway as your organization grows.

CRM and QBO

What is a CRM?

CRM stands for Customer Relationship Management. Basically, it’s a tool that keeps track of your donors’ information. It generally has the capability to send donor thank you letters, keep track of each donor’s balance for the year, and has one or more fields for notes and other details about the donor. Whether or not you have a CRM might change the way you intend to use QBO.

Why does it matter?

When first starting out, some organizations will use QBO as a makeshift CRM until they find something else. This is an option, but it is not ideal or recommended. A CRM is generally a tool used by the development team to record more than just financial information about individual donors. QBO, on the other hand, is used to record and view the financial information for the organization as a whole. Because of this distinction, if you have a CRM, it is best practice to keep individual donor information in the CRM and not replicate it in QBO.

What’s the difference in QBO?

If you don’t have a CRM and plan to record individual donor details in QBO, you will need to create a new Customer for each donor and record each donation in a separate transaction. If you do have a CRM, you can record one transaction for all of the same type of income. You can do this daily, weekly, or monthly depending on your workflow. 

Types of Revenue

Nonprofit revenue can be either earned revenue or contributions.

Earned revenue is any payment received that is paid by the people you serve in exchange for the services that you provide. For example, if you have an after school program and you charge each student $20 to attend, that $20 received is earned revenue. 

Contributions are revenue from donations and grants. There is no exchange of goods or services to the donor/funder for contributions. Contributions are further designated by unrestricted or restricted funds. 

Unrestricted funds are any contributions that are not designated by the donor or grantor for a particular purpose.

Restricted funds are any contribution or grants that are designated by the donor or grantor for a specific purpose. This can be as simple as a donation where the donor includes a note that says “Use this donation for school supplies for the children,” or it can be a large federal grant that has a budget to follow and very specific restrictions on how the funds are used. 

Restricted funds can also be Conditional. This means that the funder won’t release the funds to the organization until some requirements are met. The most common case of this is federal grants that won’t release any payments to the organization until after the money has been spent. In this case, the organization keeps track of the funds expended, submits a report and invoice to the grantor to reimburse those expenses, and then the payment will be made to the organization. Reporting alone is not considered a significant requirement, so if the only condition is a general progress report to the grantor, then that grant is not conditional.

To summarize, here’s a handy outline of the types of income:

• Earned income
• Contributions
  • Unrestricted
  • Restricted
    • Conditional

Income Transaction types in QBO and when to use them

The two transactions you will use to enter income are Sales Receipts and Pledges.

A Sales Receipt is exactly what it sounds like – a receipt. When you pay for something, you get a receipt. That is what you are creating in QBO, even if you don’t intend to provide the receipt to the payer. This receipt is your record that payment was received. 

A sales Receipt is used when a payment is received with no advance agreement, like general donations received online or at an event, or earned income paid at the time of service. Since cash basis accounting only records revenue when it is received, organizations on cash basis will generally only use Sale Receipts. Organizations on accrual basis will use both Sales Receipts and Pledges.

A Pledge is the same thing as an invoice. The only difference is that the name in QBO changes from Invoice to Pledge when you set your entity type as a nonprofit. A Pledge is used for unconditional grants that are agreed upon in advance, any other payments that you are notified of in advance, and for requesting payment on conditional grants.

There are two follow up transactions you will use as well – Receive Payment and Bank Deposits. These are only used after Pledges and/or Sales receipts are entered.

Receive Payment is the required follow up transaction to Pledges. Use Receive Payment when you actually receive the payment from a Pledge. Remember, you recorded the Pledge when you were notified that a payment would be coming in the future. Receive Payment is the next step when the payment is made to your organization.

A Bank Deposit comes into play when you receive checks and don’t immediately deposit them. For example, you checked the mail on Monday and received two checks. You entered these to QBO using Sales Receipts. Then you locked them in a drawer until Thursday when you go to the bank. On Thursday, you enter the Bank Deposit transaction in QBO to record the deposit of both checks in one deposit to the bank. Bank deposits can follow either Sales Receipts or Receive Payment transactions.