Managing the finances of a nonprofit organization requires a delicate balance of compliance, transparency, and stewardship. As an accounting manager, you’re entrusted not just with numbers, but with the financial integrity that enables your organization to fulfill its mission. Yet even with the best intentions, nonprofits can fall into accounting traps that jeopardize reporting accuracy and compliance. Let’s explore the most common accounting mistakes nonprofits make, especially regarding gift cards, and discuss practical strategies to avoid them.
Misclassifying Gift Card Transactions
Gift cards may seem straightforward, but in nonprofit accounting, they present unique challenges. A frequent mistake is misclassifying the receipt or distribution of gift cards, which can skew both revenue and expense reporting.
Gift cards received as donations should be recorded as in-kind contributions at their fair market value. However, many nonprofits mistakenly treat them as cash equivalents, or worse, fail to record them at all until redeemed. This leads to underreported contributions and inaccurate financial statements.
To prevent this:
- Record gift cards as in-kind donations at the time of receipt, assigning their fair market value based on the card’s face value.
- Establish clear policies for how gift cards are distributed, tracked, and accounted for.
- Create a separate ledger or tracking system to monitor the issuance and redemption of gift cards to ensure transparency.
By treating gift cards as inventory rather than cash, you’ll maintain a clearer audit trail and ensure compliance with accounting standards.
Inadequate Documentation for Donated Items
Nonprofits often overlook the documentation required for donated gift cards and other non-cash contributions. Without proper substantiation, you risk losing audit credibility or facing IRS scrutiny.
One common oversight is failing to obtain a donor acknowledgment letter or receipt. Another is not maintaining documentation proving the fair market value of the donated item.
Here are some practical ways to strengthen your documentation practices:
- Request written acknowledgment from donors specifying the nature and value of the gift card donation.
- Retain supporting evidence such as donation letters, appraisals (if applicable), or proof of value from the issuer.
- Document the intended use or restrictions (if any) associated with the gift card to avoid misuse or reporting errors.
Strong documentation safeguards your organization during audits and reinforces donor trust.
Improper Recognition of Gift Card Expenses
Another accounting pitfall involves how nonprofits record the expense side of gift card transactions. It’s tempting to expense the value of gift cards when they are purchased or received. However, expenses should only be recognized when the gift card is actually distributed or used.
Prematurely expensing gift cards can inflate program or fundraising expenses, distorting the true cost of operations. Additionally, if gift cards are distributed to clients or beneficiaries, they may need to be reported differently from employee gifts or incentives.
Consider these strategies to improve expense recognition:
- Record gift cards as assets (inventory) until they are distributed.
- Only recognize expenses when a gift card is provided to an individual or used for program purposes.
- Maintain a log of distributions, including recipient, purpose, and date, to align accounting records with actual usage.
Properly matching expenses with their corresponding period ensures more accurate financial reporting and budget analysis.
Lack of Internal Controls Over Gift Cards
Gift cards are highly liquid and easily misappropriated. Unfortunately, many nonprofits underestimate the need for robust internal controls over gift card inventories. Without safeguards, gift cards can become a target for fraud or mismanagement.
Common control failures include having a single person responsible for both purchasing and distributing gift cards, failing to reconcile gift card balances, or not performing periodic audits.
To strengthen controls, implement these key measures:
- Segregate duties so no one person is responsible for ordering, receiving, and distributing gift cards.
- Reconcile gift card balances regularly against accounting records and physical inventories.
- Require supervisory approval for all gift card disbursements.
- Periodically audit gift card logs to detect discrepancies or unauthorized use.
Robust internal controls reduce the risk of errors and fraud, protecting both assets and your organization’s reputation.
Overlooking State Escheatment Laws
One frequently overlooked issue is the applicability of state escheatment laws to unused gift cards. Depending on your jurisdiction, gift cards that remain unredeemed for a certain period may be considered “abandoned property” and required to be reported and remitted to the state.
Failing to comply with escheatment laws can result in penalties or fines. Many nonprofits are unaware that such regulations apply even to in-kind contributions or cards distributed for program use.
Here are actionable steps to avoid compliance issues:
- Research your state’s unclaimed property laws regarding gift cards.
- Monitor unused gift cards periodically and identify those nearing escheatment thresholds.
- Establish a policy for handling expired or unused cards to ensure timely reporting.
Understanding and complying with escheatment requirements avoids unnecessary regulatory headaches.
Building Stronger Accounting Practices
Accounting for gift cards in a nonprofit setting requires more than simply recording a transaction. It demands thoughtful classification, robust controls, and a keen eye on compliance. By addressing these common pitfalls proactively, you can enhance the accuracy of your financial statements, safeguard assets, and strengthen accountability.
If you’re ready to review your nonprofit’s accounting practices or want tailored guidance on managing gift cards and other in-kind contributions, reach out today to start a conversation about how we can help.