1. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Module 9 Managing Donations and Pledges

2. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP 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

3. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP 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 DateAccount Titles and explanationPRDebitCredit Jul 3Pledges Receivable2000 Pledges Income2000 July 15Cash2000 Pledges Receivable2000

4. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP 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)

5. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP 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)

6. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP 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)

7. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Example Donor Name DonationNot Yet Due 1 to 30 Days Past 31 to 60 Days Past 61 to 90 Days Past Alton Inc1200$1000$200 J. Firby900$400$500 K. Parker400$100$300 Total2500 % Uncollectible 0%4%12%25% Estimated Uncollectible 0$56$60$125

8. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP 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… DateAccount Titles and explanationPRDebitCredit July 3Bad Debt Expense241 Allowance for Doubtful Accts241

9. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Recording Estimated Bad Debt Notice how the AR account itself is untouched in the previous journal entry –The T-accounts look like this Pledges ReceivablePledges Income Dec 31 25002500 Dec 31 Bad Debt/Offering ExpenseAllowance for Doubtful Accts Dec 31 241241 Dec 31

10. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP 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 Cash1000 Current Liabilities AP750 Pledges Receivable2500 Wages1500 Less: Allowance for Doubtful Accts 2412259 Supplies10000Accumulated Surplus11009 Total Assets13259

11. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP 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

12. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP 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… DateAccount Titles and explanationPRDebitCredit Dec 31Allowance for Doubtful Accts2 AR – Firby2

13. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP 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 Cash1000 Current Liabilities AP750 Pledges Receivable2498 Wages1500 Less: Allowance for Doubtful Accts 2392259 Supplies10000Accumulated Surplus11009 Total Assets13259

14. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP 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 DateAccount Titles and explanationPRDebitCredit Aug 31Pledges Receivable – Firby2 Allowance for Doubtful Accts2 Aug 31Cash2 Pledges Rec – Firby2