In the not-for-profit world, there are two types of revenue (as defined by tax law and accounting standards): contributed and earned. Contributed revenue includes monetary donations from individuals and corporations as well as grants from foundations and government agencies. Earned revenue includes ticket sales, program and service fees, and media sales.
A good rule of thumb is that if a transaction represents the customer receiving a distinct item (a CD, a branded mug) or service (a performance of a concert or play), that transaction is earned revenue. If not, it’s contributed. Even though a donor may receive certain tangible benefits in exchange for the donation (perhaps even that same branded mug that a retail customer purchases), there isn’t a one-to-one correlation between the incoming funds and the value of the outgoing product or service.
With that distinction defined, let’s briefly review the proper handling of contributed revenue, and then more deeply discuss earned revenue from an accounting point of view.
I wrote about many important aspects of accounting for contributed revenue in my piece about the interface between fundraising and finance. One additional general point to illustrate: because charitable giving is not a direct exchange transaction, there is nothing discrete to refund. Thus, the date that the donor/grantor commits to the gift (whether by a pledge or by simply sending the funds), that’s the date when the assets irrevocably pass to the organization’s ownership. This is in contrast to an important feature of earned revenue.
Many arts organizations engage in typical retail transactions via their physical or online gift shops, and these transactions are simpler: The revenue is recorded and recognized on the date of the sale.
But the bulk of our earned revenue is in ticket sales and performance fees. Particularly with ticket sales, it’s important to properly handle advance ticket sales.
Suppose your organization presents The Nutcracker each December, and you start selling tickets during a “Christmas in July” sale. Your marketing team does a great job directing traffic to your online and in-person box offices and you have lots of incoming cash from that initial rush of sales.
The receipts from those sales should not be posted to your Statement of Activities for July. The reasoning is: suppose your organization ends up not able to perform The Nutcracker due to a snowstorm? Your organization would probably contact the ticket buyers and offer them the options of donating the value of the ticket, using the value of the ticket toward a future performance, or receiving a refund. Because of this uncertainty, that money is considered a liability, because your organization is liable to have to move it away from The Nutcracker, whether to somewhere else on your Statement of Activities (to donations or to another production) or out of your bank account entirely (in case of a refund).
Proper handling is to book those funds from the Christmas in July sale to the Deferred Revenue account on your balance sheet. Then, once you’ve wrapped the production in December, you perform a journal entry to “release” the funds to your Statement of Activities for December.
Also, be sure that all the funds you book to Deferred Revenue are classed or tagged with the relevant production, so that you can run sales reports per production and can compare the accounting records with the box office records as part of your month-end processes.