Pass-Through and Agency Contributions

Sometimes your nonprofit collects donations from donors and forwards the money to another organization, the beneficiary. You are acting as a go-between, not as the end recipient. This is called a pass-through or agency arrangement, and it requires special accounting treatment.

Standard accounting rules (GAAP) require you to record pass-through money as a liability (money your organization owes), not revenue. The money isn't yours; it belongs to the beneficiary until you send it. Recording it as revenue would overstate your income and misrepresent your financial position.

Here's the key distinction:

• Regular donation: A donor gives your organization $5,000 for your youth program. That's your money. It's revenue.
• Pass-through donation: A donor gives your organization $5,000 to forward to Habitat for Humanity. That's not your money. It's a liability until you send it.

Your Statement of Activities should only show revenue that belongs to your organization. Pass-through money should appear on your Statement of Financial Position as a liability that decreases when you forward the funds.

NP Ledger guides you through the pass-through workflow step by step:

1. Create a pass-through fund: When you create a new fund, select the "Pass-through to another organization" option. Give it a name that identifies the beneficiary (e.g., "Project Tortuga" or "Habitat Partnership").

2. NP Ledger creates the liability account for you: NP Ledger automatically creates a liability account in your Chart of Accounts called "Pass-Through Liability - [Fund Name]." You don't need to set this up manually.

3. Record incoming donations: When you receive a donation for the pass-through fund, select that fund in Quick Entry. NP Ledger routes the money to the liability account instead of revenue.

4. Forward the funds: When you send money to the beneficiary organization, record a bill payment from the pass-through fund. This reduces the liability on your books.

5. Check your balance: The fund balance shows how much you still owe the beneficiary. When it reaches zero, you've forwarded everything.

If your organization has variance power

Not every pass-through fund is held purely as an agent. If your board can decide to redirect the money to a different beneficiary, your organization has variance power, and GAAP treats the gift as your revenue — not a liability you owe.

When you create or edit a pass-through fund, check the variance power box. NP Ledger then records incoming donations as your contribution revenue, and when you forward the money it records a program grant expense — instead of routing everything through a liability account. Leave the box unchecked (the default) when you're simply holding money for a beneficiary you have no say over. This is the more common case, so if you're not sure, leave it unchecked.

• Fiscal sponsorship: Your established 501(c)(3) collects tax-deductible donations on behalf of a new project that doesn't have its own tax-exempt status yet.
• Collecting for a mission partner: Your organization runs a joint campaign with another nonprofit and forwards their share of the proceeds.
• Disaster relief pass-through: Your organization collects emergency donations and forwards them to an on-the-ground relief organization.
• International regranting: Your US-based nonprofit collects donations and regrants them to an international partner organization.

A community foundation collects $10,000 in donations earmarked for "Project Tortuga," a sea turtle conservation effort run by a partner organization.

1. Setup: Create a pass-through fund called "Project Tortuga." NP Ledger automatically creates "Pass-Through Liability - Project Tortuga" in the Chart of Accounts.

2. Receive donations: Record $10,000 in donations to the Project Tortuga fund. The books show:

   • Bank account increases by $10,000 (asset)
   • Pass-Through Liability - Project Tortuga increases by $10,000 (liability)
   • No revenue is recorded

3. Forward funds: Write a $10,000 check to the partner organization. Record it as a bill payment from the Project Tortuga fund. The books show:

   • Bank account decreases by $10,000
   • Pass-Through Liability - Project Tortuga decreases by $10,000
   • The liability is now zero, and all funds have been forwarded

4. On your reports:

   • Statement of Financial Position: no pass-through liability remaining
   • Statement of Activities: no revenue or expense from this arrangement (the money was never yours)

Ask yourself these questions when a donation involves another organization:

• Are you forwarding 100% of the money? If yes, it's likely a pass-through.
• Can your organization redirect the money to a different beneficiary? If yes, you have variance power. It's still a pass-through fund — but check the variance power box when you set it up, and NP Ledger records the money as your contribution revenue and the amount you pass on as a grant expense, instead of a liability. If you have no say in who receives it, leave the box unchecked and the money is held as a liability.
• Did the donor designate the money for a specific external beneficiary? If yes, and you're just the go-between, it's a pass-through held as an agent (leave the box unchecked).

When in doubt, consult your accountant. The distinction between agency transactions and contributions has real implications for your financial statements and tax filings.

Accountant Note: The distinction between agency (pass-through) transactions and contributions is governed by ASC 958-605. If the nonprofit has variance power (the unilateral ability to redirect the funds to a different beneficiary), the transaction is a contribution (revenue), not an agency arrangement. The key factor is whether the resource provider (donor) or the recipient organization (your nonprofit) controls how the funds are ultimately used. See ASC 958-605-25-24 through 25-27 for the specific criteria. In NP Ledger, mark this by checking variance power on the pass-through fund; the fund then books contribution revenue on receipt and a program grant expense on the onward payment (ASC 958-605-45), rather than an agency liability.