Tracking Donations in Xero: A Simple Guide

1. Track Donations: Use Xero's tracking categories like "Donor/Project" and "Fund Type" to monitor restricted and unrestricted funds.
2. Automate Entries: Tools like Donorbox + Zapier streamline donation data transfer.
3. Record Donations: Create invoices for donations, attach acknowledgment letters, and ensure tax compliance with proper tax codes.
4. Handle Outgoing Donations: Track cash, goods, or services with clear categories and documentation.
5. Organize Accounts: Set up specific revenue, expense, and clearing accounts for easy fund management.
6. Prepare for Taxes: Use Xero's tax tools and tracking to generate accurate donation reports.

Key Benefits:

• Automate recurring donations with bank rules.
• Maintain donor privacy with encrypted files.
• Simplify reconciliation with tracking and reporting tools.

Start with these steps to manage donations effectively and stay tax-compliant in Xero!

How to use Tracking in Xero

How do I track charitable donations?

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.

How do I enter donations in Xero?

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:

• Payment Information: Include the date received and payment method (e.g., check, EFT, credit card).
• Identifiers: Add check or transaction numbers for tracking.
• Allocation: Assign the relevant tracking categories.
• Tax Status: Confirm receipt eligibility for tax purposes.

How do I account for charity donations?

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:

• Set up a tax code for 'GST-Free Donations.'
• Keep detailed documentation for deductible contributions.

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.

How do you account for donations given?

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.

Setting Up Your Xero Charity Chart of Accounts

Enhance Xero's tracking capabilities by setting up these key accounts for your charity:

Setting Up a Charitable Donations Expense Account

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

Setting Up a Donations Clearing Account

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.

Creating a Donation Revenue Account

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.

How to Record Charity Donations in Xero

Documenting a Single Donation Entry

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.

Handling Recurring Donations

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.

Reconciling Donation Transactions

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

Utilizing a Donation Tracking Spreadsheet

While Xero offers robust tools, a detailed tracking spreadsheet can add another layer of organization. Use it to monitor:

• Core Data Fields: Include Donor ID, Pledge Date, and Fulfillment Status.
• Fund Allocation: Add columns to track how funds are distributed.
• Audit Documentation: Link supporting documents stored in Xero Files for easy audit preparation.

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.

How to Create an Invoice for a Donation in Xero

Setting Up a Donation Invoice for Pledges

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.

Recording Payments for Donation Invoices

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.

Generating Donation Receipts from Invoices

You can create donation receipts directly from invoices in Xero by customizing the invoice template. Make sure to include these required details:

• Charity registration number
• Tax-deductibility statement
• Reference to the original invoice

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.

Tracking Donations for Taxes in Xero

Preparing Donation Reports for Tax Filings

Using Xero's tracking categories, you can easily create reports tailored for tax purposes. Here's how:

• Filter reports by donor or project tracking categories to organize data effectively.
• Design custom layouts that align with the required tax authority formats.
• Add region-specific tax codes to ensure compliance with local regulations.

Understanding Tax Deductibility of Donations

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.

Leveraging Xero's Tax Tools for Donation Entries

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:

• Archive donation accounts regularly.
• Export quarterly reports for external storage.

For compliance with data retention policies:

• Turn off automatic invoice deletion in the Settings menu.
• Enable archiving for all accounts related to donations.
• Save quarterly reports in an external, secure location.

Best Practices for Managing Donation Records in Xero

Regular Review and Reconciliation of Donation Accounts

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.

Ensuring Donor Privacy and Data Security

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.

Staying Compliant with Nonprofit Accounting Standards

To comply with FASB 117, align your chart of accounts with these categories:

• 4200: Unrestricted Donations
• 4210: Restricted Grants

"Include retained earnings and current year earnings in project schedules."

Adopt a clear retention policy for donation records:

• Store tax-deductible donation records for 7 years.
• Keep permanent records for endowment gifts.
• Retain small unrestricted gift records for 3 years.

Conclusion: Simplifying Donation Accounting in Xero

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.

Related Blog Posts

• Track Expenses in Xero: A Simple Guide
• Using Xero for Non-Profits: A Guide
• Tracking Donations in Xero for Non-Profits
• Using Xero for Nonprofits: Simplifying Finances