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Start with these steps to manage donations effectively and stay tax-compliant in Xero!
Tracking charitable donations in Xero involves setting up a clear system to keep accurate records and meet tax requirements. Xero provides tools to record every detail needed for compliance.
To start, create a 'Fund Type' tracking category in addition to your donor or project tracking categories. This helps you separate restricted and unrestricted donations. For each donation, make sure to record these details:
Record Type | Required Information | Documentation |
---|---|---|
Cash/Check Donations | Organization name, amount, date | Acknowledgment letter |
In-Kind Contributions | Item description, fair value | Appraisal documents |
You can attach digital acknowledgment letters directly to transactions in Xero. Use Xero's tax tools to automate numbered receipts and handle GST/VAT separation efficiently.
Check your tracking allocations weekly and run monthly donation reports to ensure bank deposits align with your revenue accounts. If there are any discrepancies, investigate them promptly to maintain accurate records.
Go to Settings > Chart of Accounts, then enable the 'Receive payments' option in the account settings (found at the bottom right of the screen). Make sure to save your changes before proceeding.
Once your accounts are set up, use the following structure to record donations:
Invoice Component | Details to Include |
---|---|
Title | Label it clearly as a donation |
Reference Field | Include donor identification |
Line Item Description | State the purpose and tax status based on tax compliance rules |
Tracking Category | Specify fund allocation |
Tax Code | Use the applicable tax-exempt code for your region |
To ensure everything is properly documented, fill out these key details:
Handling donations properly depends on whether they are monetary contributions or in-kind donations. For donated goods or services your organization typically sells, follow this workflow in Xero:
Step | Action | Accounts |
---|---|---|
1. Create sales receipt | Generate a sales receipt for the donated items | Debit Inventory, Credit COGS |
2. Issue credit memo | Create a credit memo labeled "Donation" | Credit Inventory |
3. Record transaction | Log the donation in your revenue account | Debit [Your Donation Expense Account] |
This method ensures your inventory remains accurate while properly recording charitable contributions.
Key tax setup steps:
These practices help you maintain organized and audit-ready records, making tax reporting smoother and more efficient. Further tax-related details are outlined in later sections.
While earlier sections covered incoming donations, it's equally important to properly track and manage outgoing contributions to ensure accuracy and compliance in Xero.
To record outgoing donations in Xero, you can set up tracking categories tailored to their purpose:
Category Type | Options | Example Entry |
---|---|---|
Donation Purpose | Education, Healthcare, Emergency | Scholarship Fund |
The accounting method depends on the type of donation:
Type | Xero Entry | Documentation Required |
---|---|---|
Cash | Bank transaction with expense code | Payment receipt, board approval |
Goods | FMV (Fair Market Value) entry with appraisal | Appraisal report, transfer documents |
Services | Market-rate value entry | Service agreement, rate documentation |
Use Xero's paperclip feature to attach essential files like payment receipts or valuation reports for easy reference.
For restricted donations, it's best to use separate bank accounts to clearly distinguish funds. This ensures proper segregation and prevents mixing of funds, which will be reflected in Xero's bank reconciliation reports. These records also sync seamlessly with Xero's tax tools, which are explained in later sections.
Enhance Xero's tracking capabilities by setting up these key accounts for your charity:
To monitor outgoing donations, create a specific expense account in Xero's chart of accounts. Go to Accounting > Chart of Accounts, click "Add Account", and select "Expense" as the account type. Label it clearly, such as "Charitable Donations - Expense", to separate it from other operational costs.
Account Type | Purpose | Example Name |
---|---|---|
Expense | Tracks outgoing donations | Charitable Donations - Expense |
Revenue | Tracks incoming donations | Unrestricted Donations (DON-400) |
Clearing | Temporary holding for funds | Donation Clearing |
A clearing account acts as a temporary holding area for donations before they are allocated. This is especially useful for managing large grants or restricted funds. For instance, if your organization receives a $10,000 grant, the funds can first be placed in the clearing account before being distributed to specific projects or programs.
To keep your financial records organized, create separate revenue accounts for various donation types. This ensures clear tracking and reporting:
Revenue Account | Purpose | Example Code |
---|---|---|
Unrestricted Donations | Funds for general operations | DON-400 |
Restricted Grants | Funding tied to specific projects | DON-401 |
Corporate Giving | Contributions from businesses | DON-402 |
These accounts help simplify financial reporting and make it easier to manage donations, especially when dealing with tax-related matters later on.
When recording a single donation, use the tracking categories you set up earlier. Include key details like the donor's name, date of the donation, amount, and payment method. For example: "John Smith | 15/02/2025 | $500 | Check | Education Fund". Documents attached to these entries are kept secure with bank-grade encryption through Xero Files.
To avoid duplicate entries, enable Duplicate Transaction Alerts in the Settings menu.
For recurring contributions, Xero's Repeating Invoices feature simplifies the process while keeping records accurate. Customize the setup as follows:
Recurring Setup Element | Suggested Configuration |
---|---|
Invoice Numbering | DONOR-YYYYMM |
Payment Schedule | Monthly or Quarterly |
Tracking Category | Specific to the donor |
Auto-reminders | Turned on |
This approach ensures consistency and saves time for regular donors.
Use bank feeds labeled 'Donation' to automate transaction imports. Set up bank rules with a ±2% tolerance for amounts and a ±5-day window to match transactions automatically. Once reconciled, these records integrate seamlessly into tax reporting tools.
"Combinations solve complex reporting needs where donors fund multiple projects" - Calxa Implementation Case Study
While Xero offers robust tools, a detailed tracking spreadsheet can add another layer of organization. Use it to monitor:
For donations funding multiple projects, Calxa integration can generate detailed combination reports, showing how contributions are allocated across initiatives. This extra tracking ensures compliance with accounting standards and strengthens your overall record-keeping.
Use Xero's tracking categories to organize your donation invoices. For instance, assign categories like 'Smith Foundation' and 'Restricted: Literacy Project' to Invoice #EDU-2024-001. This ensures each invoice reflects both the donor and the specific purpose of the funds.
When payments are applied to donation invoices, Xero automatically preserves the tracking categories. For example, if a $5,000 payment is recorded for Invoice #EDU-2024-001, the "Education Fund" designation will remain intact, keeping your records consistent.
You can create donation receipts directly from invoices in Xero by customizing the invoice template. Make sure to include these required details:
For larger batches of receipts, take advantage of Xero's batch PDF export feature, filtering by the 'Donation Receipts' report category.
To streamline the process further, connect Donorbox to Xero using Zapier. This integration allows you to automatically generate invoices based on data from your donation platform, seamlessly aligning with your bank rules and reconciliation workflows.
Using Xero's tracking categories, you can easily create reports tailored for tax purposes. Here's how:
To properly handle tax-deductible donations, set up a two-part system within Xero using tracking categories. Here's a breakdown:
Method | How It Works | Why It's Useful |
---|---|---|
Tracking Category | Use "Deductibility Status" | Identifies the tax status of donations |
Tax Code | Apply custom regulatory codes | Differentiates deductible and non-deductible contributions |
Account Classification | Separate revenue streams | Organizes donation types for clarity |
Connect these codes to the tax indicators set in donation invoices (refer to 'How to Raise an Invoice'). For international operations, create specialized tax rates like "GST-Free - Donation" for Australia/New Zealand or "VAT Exempt - Charitable Gift" for Europe.
Tax codes work seamlessly with donation revenue accounts set up earlier. Automate tax categorization by creating bank rules that recognize 'DONATION' in payment descriptions. To keep accurate, audit-ready records:
For compliance with data retention policies:
Using Xero's tax tools effectively means setting up a consistent reconciliation routine. Here's a quick guide based on transaction volume:
Transaction Volume | Frequency | Tools |
---|---|---|
50+ daily donations | Daily or Weekly | Batch Payment Reconciliation |
10-49 daily donations | Weekly | Bank Rules + Auto-Matching |
Fewer than 10 daily | Monthly | Manual Reconciliation |
To catch and fix errors like duplicate entries, take advantage of Xero's "Find & Recode" tool. For example, one charity uncovered £15,000 in missed funds by running monthly variance reports with tracking categories.
While Xero includes built-in security, you can enhance it by setting up tiered access levels:
Role | Access Level | Permissions |
---|---|---|
Fundraisers | Limited | Create invoices only |
Accountants | Extended | Full access (no admin rights) |
Directors | Restricted | Financial reporting only |
For protecting sensitive donor data, consider using coded tracking values in Xero (e.g., Anonymous-2023). Keep a separate encrypted spreadsheet for cross-referencing, ensuring privacy without sacrificing transparency.
To comply with FASB 117, align your chart of accounts with these categories:
"Include retained earnings and current year earnings in project schedules."
Adopt a clear retention policy for donation records:
Xero's tools, like tracking categories and reconciliation workflows, bring three major benefits to nonprofits: easier fund management, improved donor confidence through transparent reporting, and automated compliance monitoring.
Here are two critical metrics to prioritize:
Key Outcome | Benefit |
---|---|
85-95% Restricted Fund Utilization | Ensures grant compliance |
>70% Donor Retention | Promotes funding stability |
To make these strategies more affordable, Xero offers nonprofits a 25% discount, ensuring that organizations of all sizes can access these features. These tools help meet nonprofit standards while making the best use of available resources.
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