Specifics are always tied to events and occasions, the donations received as such are hence dependable of the business type, industry the company is in etc., however, if there is an occasion your company does receive a donation, the treatment and disclosure requirements are still more or less the same. There are some special disclosure requirements for government grants and donations, but please consult your local reporting and disclosure framework guidance for it. With the following we are focusing on the accounting treatment.
If the grant is just given out without any further conditions, the amount given is your income (note here that if it’s for a specific investment or type of expense, it’s always shown as a part of that investment (decrease) or expense (decreasing the expense in essence)). When you receive the money or it’s more than probable you will obtain the donations and there are no conditions tied to it, you make the following entry:
1. You get to know of the donation to be received
Debit Other receivables 500
Credit Investment purchase / Operating expense / Other operating income (depending on the type of the donation – see above) 500
2. Receiving the payment
Debit Cash and cash equivalents 500
Credit Other receivables 500
In case you receive the money and there is not delay between you knowing of the decision and the actual payment, you skip the Other receivables entry and just recognize the cash received and credit either the investment acquisition, expense account or other operating income.
If the grant or donation is in any way tied to conditions or requirements, the first recognition is done in the amount that probably will be paid out. However, if it’s less than probable that the donation receiver will meet the conditions, the income is not recognized. Other than that, the entries are the same.
thanks for the info about donation…
my inquiry is this..
We have Advances from our Stockholder, since we have no source to pay them and they don’t want us to pay them so they’ll just give it to us for free as a Donation. Now.. this donation will be treated as part of our Operating Income, based on your explanation above. So this will form part in our Income Statement… from Sales plus this Donation equals Total Revenue, then Deduct Operating Expense equals Net Income before tax then Less Income tax of 30% (Philippine BIR) equals Net Income….
Is this the correct treatment or presentation?? \
Thank you and hoping for your reply.
Thank you for the question!
My first concern arises from the ‘advances from our stockholder’ – is it something the company has to pay to its stockholder? So essentially it’s a liability that the stockholder now says it doesn’t want? It’s important to understand where this liability initially came from. For an example, if it was decided at one point that the company is to pay dividends but the results of the company went for the worse and now it’s just a liability the company is not able to pay, the dividends should be cancelled and the accountry entry is Db Liabilities, Cr Retained earnings (presuming the dividends were initially declared out of ‘retained earnings’). There would be no impact on the company’s income statement.
If it is something that the stockholders gave for the company, so say it’s a ‘loan’ and now it has been treated as ‘a loan the stockholder doesn’t want back’ a formal agreement of such waiver should be signed and the loan would normally be treated as a payment into equity (to either ‘share capital’, ‘share premium’ or some other reserve your local legislation allows make payments into). Payments from stockholders into the company are very rarely treated as part of the income for the period.
A donation from the stockholders, if we call it like that, would still be a payment into the equity as they help in financing the entity. I would consult your local legislation regarding payments into the equity however.
I hope this answers your question.