Understanding Pass-Through Contributions in Nonprofit Accounting

Pass-through contributions are donations made by one nonprofit organization to another nonprofit organization, with the intention that the funds will be used for a specific project or purpose.

For example, a foundation may provide a grant to a nonprofit organization to fund a specific program or project. The nonprofit organization receiving the grant is responsible for using the funds in accordance with the grant agreement and reporting on the use of the funds to the foundation.

Pass-through contributions are important in nonprofit accounting because they represent a significant source of funding for many organizations. It is important for nonprofits to properly account for and report on pass-through contributions, including tracking the use of the funds and providing appropriate documentation to the donor organization.

Nonprofits must also be aware of any restrictions or requirements that may be attached to pass-through contributions. For example, the donor organization may require the nonprofit to use the funds for a specific purpose or to meet certain reporting requirements.

Properly managing pass-through contributions is important for maintaining good relationships with donor organizations and ensuring that the nonprofit is able to effectively carry out its mission.

Recording of Pass-Through Contributions under GAAP

Under GAAP, pass-through contributions should be recorded as a liability by the pass-through organization until the funds are distributed to the final recipient organization. Once the funds are distributed, the pass-through organization should record the distribution as an expense and reduce the liability accordingly. It is important for the pass-through organization to track and report the pass-through contributions separately from their own revenue and expenses, as they are simply acting as an intermediary in the process. Proper accounting for pass-through contributions is crucial for ensuring financial transparency and accountability for both the pass-through organization and the final recipient organization.

When to Record Pass-Through Contributions as Revenue

Under GAAP, a pass-through organization may record the funds as revenue in certain situations where the organization has control over the funds and is considered the primary beneficiary. This could occur when the pass-through organization is responsible for managing the funds and has discretion over how they are used, or when the organization is providing services in exchange for the funds. However, it is important to consult with an accounting professional to determine the appropriate accounting treatment based on the specific circumstances of the transaction.

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 13 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

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