Journal Entry for Endowment Funds

Endowment Funds are the investment that the donor made on behalf of the nonprofit organization and allow the entity to use the income to support the operation.

Nonprofit organization is an entity that establishes for the purpose of not making money. People create nonprofit organizations to further a specific purpose, rather than to generate earnings or assets for the founders. Nonprofit organizations are established for public safety and security and to serve the community good. It includes the Red Cross, which was established for disaster preparedness and relief.

Nonprofit organizations can raise money through various methods such as government funding, membership fees, selling products, and donations. However, the majority of the cash will receive in form of donations from various donors. So they have to raise the donation through different kinds of events and methods. They need the fund to operate, but they cannot keep raising money forever.

Some organizations try to raise a sum of money to invest in marketable security which generates a return to support the entity. The endowment is the fund that is supported by the donor for charity purposes and supports the non-profit organization. Any individual can make a donation to most nonprofit organizations directly from their checking account.

It is the fund that donors set up for the non-profit organization, but it is not under the control of the entity. The nonprofit entity can own the investment and receive the return from the investment. However, the entity may not be able to withdraw the investment to support the operation. It depends on the term and condition of the endowment fund.

The fund consists of cash and market securities such as bonds, equities, and so on. It is mostly held by universities, churches, and charities organizations. It is similar to a mutual fund except the beneficiary is the nonprofit organization. The entity can use the investment income in the scope of endowment fund set by the donor.

Journal Entry for Endowment Funds

The nonprofit entity receives the fund from a donor with a specific purpose, they have to record cash received and revenue donation. The cash needs to have a separate account from a normal cash account and the revenue donation is also recorded in one account. The journal entry is debiting cash endowment and credit revenue endowment.

Account	Debit	Credit
Cash – Endowment	$$$
Revenue – Endowment Donation		$$$

This transaction will increase the cash balance that entity receives from donor and recognize revenue. However, the cash needs to keep in a separate account as it must be used for endowment rather than support the operation. When the investments are made, an entity needs to record its assets on the balance sheet and reduce cash. The journal entry is debiting investment – endowment and credit cash – endowment.

Account	Debit	Credit
Investment – Endowment	$$$
Cash – Endowment		$$$

Journal Entry for Endowment Funds Example

XYZ is a nonprofit organization that supports charity in Africa. During the month, the entity has received $ 5 million from one company as an endowment. The company requires XYZ to invest the whole fund as bonds and generate the interest income to support its operation.

When XYZ receive cash donation, they have to record cash received and revenue. The journal entry is debiting cash – endowment $ 5 million and credit revenue – endowment $ 5 million.

Account	Debit	Credit
Cash – Endowment	5,000,000
Revenue – Endowment Donation		5,000,000

When they make an investment in bonds, the entity has to record the investment account. The journal entry is debiting investment in bonds and credit cash – endowment.

Account	Debit	Credit
Investment in Bonds – Endowment	5,000,000
Cash – Endowment		5,000,000