Accounting for Gift Aid
There are many ways people account for gift aid, with the most common way being simply recording the income as it comes in every quarter. This isn't wrong but if you want to keep a track of your gift aid-able income on a more regular basis, for monthly reporting for example, I have found the following to be the most successful way to do so.
How charities are currently accounting for Gift Aid:
What usually happens is charities will keep a record of which donations that they receive are gift aid-able and just record the net donation on their software (for this example I'll be using Quickbooks). Then once the return has been sent to HMRC and the gift-aid payment has been received, they will tend to see a spike in donation income in the first month of the quarter.
When looking at the annual accounts, this won't make a different when it's a snapshot of the income for the year, but it does skew figures when reporting monthly back to the board or funders.
How charities should account for Gift Aid:
So we need to find a way of including donations income which is inclusive of Gift Aid, but figuring out how to exclude it from our bank reconciliation!
To do this, you will need to create a new Current Asset account on your Chart of Accounts called 'Gift Aid Debtor'.
Now, every time you receive a donation which is eligible for Gift Aid, and for this example we will be using the simple figures of £20 donation + £5 Gift Aid, you need to create a deposit as follows:
As you can see from above, income will read at the gross amount (£25) on your income statement, but the net figure (£20) will appear in your bank reconciliation.
So then what happens with the £5 Gift Aid debtor, you ask? On your balance sheet, your gift aid debtor figure will continue to grow as you continue to receive eligible income and this is a great way to keep track of how much you will actually need to claim back from HMRC when the time comes.
Once you have made the quarterly claim to HMRC and receive the payment, you can simply record the payment as a 'Deposit' against the 'Gift Aid Debtor' account and this should clear the balance sheet account back to zero.
Hopefully this will save you the time and effort of using two separate systems to record income and other information needed for your quarterly claim.
If you have any further questions or even suggestions about anything above, we would love to hear from you! Click here to contact us.