How to Categorize Donations in QuickBooks Online

Recording a donation in QuickBooks Online seems simple until you're faced with the deposit screen, wondering exactly where the money should go. Getting this right is about more than just tidy bookkeeping; it ensures your financial reports are accurate for board meetings, grant applications, and tax season. This guide will walk you through the proper way to set up and categorize donations your organization receives, as well as contributions your company makes.

The First Step: Setting Up Your Chart of Accounts

Before you can record any transaction, you need a designated place for it. In accounting, this place is an account in your Chart of Accounts. Creating specific accounts for donations keeps your reporting clean and gives you clear visibility into your funding sources.

For donations your organization receives, you’ll need an Income account. Here's how to set one up:

1. Click the Gear icon in the top right corner and select Chart of Accounts.
2. Click the green New button.
3. For Account Type, select Income.
4. For Detail Type, the best fit is typically Non-Profit Income or Contributions/Donations.
5. Name the account something clear, like "Donation Income" or "General Contributions."
6. Click Save and Close.

Pro Tip: Consider creating sub-accounts for different types of funding. For instance, distinguishing between unrestricted and restricted donations is vital for many nonprofits. You could have a main account called "Donation Income" with sub-accounts for "Unrestricted Donations," "Restricted - Building Fund," and "Grants." This provides a much clearer picture of your financial obligations on your Profit and Loss statement.

For charitable contributions your business makes, you'll need an Expense account:

1. Navigate back to the Chart of Accounts and click New.
2. This time, for Account Type, select Expenses.
3. A good Detail Type is Charitable Contributions.
4. Name it "Charitable Contributions" or "Donations Made."
5. Click Save and Close.

With these accounts in place, you're ready to start categorizing transactions.

How to Categorize Donations Received by Your Organization

When a donor gives you money, the best practice is to use a Sales Receipt. This transaction form not only records the income but also ties it to the specific donor (or "customer" in QuickBooks terms), making it easy to create year-end giving statements.

Step 1: Create a "Donation" Product/Service Item

You need an item to put on the Sales Receipt that links the transaction to your new income account. Think of this as the bridge between the sales form and your Chart of Accounts.

1. Go to the Gear icon > Products and Services.
2. Click New and select Service.
3. Name it "Donation."
4. Under the Income account dropdown, find and select the "Donation Income" account you created earlier. This is the most important step!
5. Leave the "Price/Rate" blank, as the amount will vary.
6. Make sure the "Is taxable" box is unchecked.
7. Click Save and Close.

Step 2: Create the Sales Receipt

Now, let's record a donation from a donor.

1. Click the + New button and select Sales Receipt.
2. In the Customer field, select your donor. If they aren't on the list, you can add them on the fly.
3. Enter the Payment date and Payment method.
4. For the Deposit to account, we recommend selecting Undeposited Funds. This is a special temporary account in QuickBooks. It lets you group multiple payments (e.g., several checks received on the same day) into a single bank deposit, which makes reconciling your bank statement incredibly easy.
5. In the Product/Service section, select the "Donation" item you just created.
6. Enter the donated amount in the Amount column.
7. Click Save and send to email the donor a receipt, or just Save and close.

Step 3: Record the Bank Deposit

Once you are ready to take the physical checks or cash to the bank, you need to move the money out of Undeposited Funds and into your bank account in QuickBooks.

1. Click the + New button and select Bank Deposit.
2. In the Account field, make sure your actual bank account (e.g., Checking) is selected.
3. The top section of the screen will show all the payments currently sitting in Undeposited Funds. Check the box next to all the donations that are part of this specific deposit.
4. Verify that the total at the bottom right matches the actual deposit slip you're taking to the bank.
5. Click Save and close.

Recording In-Kind (Non-Cash) Donations

Sometimes you'll receive goods or professional services instead of cash. These are called in-kind donations and need to be recorded at their Fair Market Value (FMV). This can be tricky, as the organization must record the contribution for its own books, but the donor is ultimately responsible for valuing the item for their own tax deduction.

Since no cash is exchanged, a Sales Receipt isn't the right tool. Most accountants will use a Journal Entry instead:

1. First, make sure you have an income account ready, such as "In-Kind Donation Income." You may also need a corresponding asset or expense account, depending on what was donated (e.g., "Computer Equipment," a Fixed Asset account, or "Professional Fees," a normal Expense account).
2. Click the + New button and select Journal Entry.
3. Enter the date of the donation.
4. On the first line, select the Asset or Expense account you want to Debit. For example, if you received donated laptops valued at $1,500, you would debit your "Computer Equipment" account by $1,500. This increases the value of assets.
5. On the second line, you’ll Credit your "In-Kind Donation Income" account for the same amount. This increases your income.
6. In the Description field, add plenty of detail: describe the donation, who it came from, and how the FMV was determined. This is your audit trail.
7. Click Save and close.

How to Categorize Donations Your Business Makes

When your for-profit business makes a charitable contribution, the process is much simpler. You're just recording an expense.

1. Click the + New button and select Expense (or Check if you're writing a physical check).
2. Select the Payee (the charity you donated to).
3. Choose the Payment account (the bank or credit card account you paid from).
4. Under the Category details, select the "Charitable Contributions" expense account you set up at the beginning.
5. Enter the amount of the donation.
6. Important: Attach a digital copy of the donation receipt or the thank-you letter from the charity directly to the transaction using the Attachments feature at the bottom. This keeps all your documentation in one place for tax time.
7. Click Save and close.

Generating Reports on Donations

The whole point of diligent categorization is to generate useful reports. Now that your data is clean, you can easily track your giving and receiving.

• To see total donations received: Run a Profit and Loss report. Your "Donation Income" accounts will be clearly listed in the Income section.
• To get a list of donors and their totals: Go to Reports and run the Sales by Customer Summary report. This will list every "customer" (donor) and the total amount they've given in the selected period. You can then use this to prepare acknowledgment letters.
• To see your company's total charitable giving: A standard Profit and Loss report will show your "Charitable Contributions" expense account right in the Expenses section.

Final Thoughts

Properly categorizing donations in QuickBooks Online all comes down to a solid initial setup of your Chart of Accounts and consistently using the right transaction forms—Sales Receipts for receiving money and Expenses for giving it away. Follow these best practice steps and you will ensure your financial reports are always accurate and ready for your next audit, donor meeting, or tax return.

While correct bookkeeping is the foundation, giving and receiving donations often brings up complex tax questions around deductibility, documentation requirements, and state-specific rules. When you need to move beyond "how" to enter a transaction and get to "why" a particular donation is or isn't deductible, having a reliable research tool is essential. That's how we help; Feather AI provides fast, citation-backed answers to your tax questions, so you can advise your clients or manage your organization’s finances with complete confidence.