Our charity has been donated some goods for resale. In preparing the accounts I am following Charities SORP (FRS 102) which has the following as standard accounting practice:
“Donated goods for resale are measured at fair value on initial recognition, which is the expected proceeds from sale less the expected costs of sale, and recognised in ‘Income from other trading activities’ with the corresponding stock recognised in the balance sheet. On its sale the value of stock is charged against ‘Income from other trading activities’ and the proceeds from sale are also recognised as ‘Income from other trading activities’.”
I interpret this as meaning that I should record the fair value of the goods as sales income (say on code 4000 ‘General Sales’, or perhaps better in a custom account ‘Donations in kind’), and add it to Stock (1001).
Then when the goods are actually sold, the sale itself should be recorded in the usual way under ‘General Sales’. At the same time the original “fair value” amount should be removed from Stock and presumably the corresponding amount should be deleted from the income category (Donations in kind) - otherwise there would be double counting of income.
I am having some trouble getting my head around this (for one thing I am not used to dealing with stock). But my immediate difficulty is as follows:
How should I record the value of the goods as “income”? Normally I post things to nominal accounts via tagging on the bank account. But in this case there is no money involved (no bank transaction to record).
Please could you recommend an approach to follow. For example should it be done by journal, and if so what form should the journal take?
I’d definitely suggest running this past a real accountant (I’m not one), but my reading of that is that you only need to worry about this for donated goods that you have in hand at the end of your accounting period that you haven’t yet sold.
Normal accounting practice for selling goods that you buy is that you book the full retail price of the goods as income in the accounting period where you make the sale, and book the cost of buying the goods in the same period (even if you actually bought them in a different period). The rule you’ve quoted for donated goods seems to say that you’re supposed to book the value of the donation in the period when it was donated, and the gross profit on selling the goods (the retail price minus the value) in the period when they were sold. So when you sell things in the same accounting period that they were received it’s effectively a normal sale with zero cost, when the donation is in period X and the sale in X+1 then you just need to deduct the value of the goods from your period X+1 general sales and add it to period X.
This translates to a pair of journals, on the last day of period X you’d credit general sales (or a new nominal “goods donated” in the sales range) and debit stock, then on the first day of X+1 debit general sales and credit stock for the same amount.
Thank you, that’s helpful advice, especially in clarifying that the year end situation is what matters.
I am still puzzled by the practical question of how to add the value of goods to Stock when there is no matching monetary transaction (as there would have been had the stock been purchased).
However a closer reading of SORP FRS 102 appears to give me a “let out” clause as follows:
“6.10. If it is impractical to measure the fair value of goods donated for resale or if the costs
of valuation outweigh the benefit to users of the accounts and the charity of this
information, the donated goods must then be recognised when they are sold.”
In our case, estimating fair value in advance of sale is rather dubious; also the amounts concerned are small, and the benefit of the exercise to users and to the charity seems negligible. Therefore I think it’s justified to book the value of the donation at the point when it is sold, i.e. to treat it as what you describe as “a normal sale with zero cost”. (In which case I don’t need to worry about year end stock…)
No doubt larger charities, who deal with significant volumes of donated goods, would have to take a different approach.
That’s what my suggested journals do. Normally a paid-up sales invoice generates a credit on “general sales” (the “source” of the money) and a debit on your bank account (where the money ends up - remember that for bank accounts “debit” and “credit” are reversed from what you’re used to on bank statements as those are written from the bank’s perspective rather than yours), my “end of year X” journal does a similar thing by crediting sales (as the source of the value coming into your business) and debiting stock (where the value ends up on your balance sheet).
So (thinking this through as a non-accountant): If I enter an item of income into the bank account, it creates a debit in the bank account and a credit in another account (either a specific account like General Sales if you’ve tagged it, or else it goes temporarily into Suspense).
I should think of Stock in a similar way (Stock is an “asset” account like the bank accounts). So an item coming into Stock is actually a debit in the Stock account and a credit somewhere else. In this case it would be General Sales, or - if that feels non-intuitive because nothing was actually sold - it could be another custom account in the Sales area like “Donations in kind” as suggested above.
I’m not sure if I’ll ever get my head properly around double entry bookkeeping, but I’m grateful for this explanation (and also grateful to Quickfile for dealing with most of this stuff in the background and making my life easier…)
You’ve got it. I think of double entry book keeping like moving piles of money around on a table - the “credit” side is where the value comes from, the “debit” side is where it ends up. So when I make a sale I shuffle money from the “income” pile (credit general sales) to the “money customers owe me” pile (debit debtors control), when I receive payment it moves from “money customers owe me” (credit debtors control) to “money in the bank” (debit current account). When I buy an asset it moves from “money in the bank” (credit current account) to “money tied up in things I own” (debit plant and machinery or whatever). Obviously this is slightly simplified but the metaphor helps me visualise what’s going on.