By showing Pledges Receivable on the Balance Sheet, a nonprofit organization shows the amount of money it can reasonably expect to receive in the future in pledged contributions. In the past, organizations have had some leeway in the timing of recognizing pledges as income. In 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 116, Accounting for Contributions Received and Contributions Made, that set down firm guidelines for pledge accounting.

What Pledges Should be Recorded?
A pledge must be bona fide to be recorded in the accounting system. Some indicators that a pledge is valid include written evidence created by the donor using words such as ìpromise,î ìagree,î or ìbinding,î or whether the pledge appears to be legally enforceable.

Pledges are either conditional or unconditional. An unconditional pledge is a promise by a donor to give a gift to the nonprofit in the future. The nonprofit does not need to meet any specific requirements before receiving the gift, and there are no other conditions stipulated by the donor. The examples at the beginning of this article illustrate unconditional pledges. Statement 116 asserts that unconditional pledges must be recorded in the financial record when they are made.

A conditional pledge is contingent on the occurrence of an uncertain future event. For example, a donor might promise to contribute $1,000 if the organization obtains a matching gift of $2,000 from new sources. Conditional pledges are recorded on the books only when the condition is met, so this pledge would not be recorded as revenue until the matching gift is obtained. (Once a condition has been met, in the above case when a matching gift has been obtained, the pledge becomes unconditional, and is recorded.) Prior to meeting donor-imposed conditions, conditional pledges are included in the footnotes to the financial statements.

What are the Accounting Entries for Recording Pledges?
Suppose that at the end of the 1994 fiscal year, you have two unfulfilled pledges: one is a pledge to make a gift of $1000 during the next year; the second pledge promises gifts of $2,000 per year in each of the next three years, for a total of $6,000.

The end-of-year journal entry to record these unconditional pledges is:

Pledges receivable	$7,000
Contributions Receivable		$7,000

To record newly received unconditional pledges

When the pledge payment of $1,000 is received in 1995, the entry is:

Cash	$1,000
Pledges Receivable		$1,000

To record receipt of a pledge

It is important to note that the $1,000 is recognized as revenue in 1994, and not in 1995 when the cash was actually received.

In an example of a conditional pledge, a donor may pledge $25,000 to renovate a half-way house on the condition that the building is purchased. This pledge would be mentioned only in a footnote until the nonprofit buys the building. At that point the pledge would be recorded and recognized as revenue.

How Do We Account for Uncollected Pledges?
Accounting for collectible pledges is similar to accounting for uncollectible accounts receivable. For example, suppose $20,000 in unconditional pledges were made to your organization during the year and your experience indicates that, on average, 20 percent of these will not be collected. An expense account can be established called ìAllowance for uncollectible pledges.î The following journal entry would be made at the end of the year:

Uncollectable pledges expense	$4,000
Allowance for uncollectable pledges		$4,000

To record estimate of uncollectable pledges

The allowance account would subtract from the value of pledges receivable on your balance sheet:

Pledges receivable	$20,000
Less: Allowance for uncollectable pledges	4,000
Net pledges receivable	$16,000

Reporting Issues
The question has been posed that implementing these guidelines could lead an organization to show a ìsurplusî when, in fact, the income is pledges that have not been received. This is a concern that was noted by one member of the Financial Accounting Standards Board in a dissenting opinion, noting that he is ìtroubled by the potential for misunderstanding of financial information resulting from the requirement. Organizations, particularly those that rely heavily on annual pledge drives, will report large increases in net assets if promises are recorded.î He is concerned that the amounts will be regarded as surplus resources or otherwise misinterpreted by financial statement users.

At the time this article was written, the FASB guidelines have just been implemented by nonprofit organizations. Over the next few years, through experience and FASB rulings, the practical implications of the guidelines will become clear.