Accounting for Gifts Received and items bought from that gift money

Mychael M

I receive gift money from Mom toward the end of each year. It is not an amount that requires reporting. I usually just enter it as Personal Income: Gift Received. When I spend the money, I would like the records to reflect that it is not a budgeted expense, but that it was spent from that gift income. I might go from November until October before I spend the money (so the income and expenses often occur in different years). In October, I bought a receiver for our home stereo system. Normally I would enter that under the Electronics category, but I don't want it to show up under our budget as Electronics. I guess my question comes down to how to enter transactions that came from gift money so they appear as gifts rather than expenses. Any ideas? Thanks!

Frankx

Hi @Mychael M

One - top of the head - thought, would be to adjust the way you are reporting the gift as well as where you post the spending of the gift.

I can make a good argument that a gift really isn't really income at all.  Clearly it is not a payment for services you have provided, it isn't income from an investment, and its not taxable to you.  So you might consider simply entering it into a balance sheet account, which you could call "Gifts Reserve" or something else.  This keeps it out of your budget.  Then, when you buy something with those funds, you simply reduce the amount in that account.  This also let's you track those funds to make sure you actually buy things for yourself, which theoretically is what the donor wants you to do.  If you happen to spend more on that stereo system than the balance in the Gifts Reserve account, then that overage comes out of your "Electronics" category and this years budget.

Just a thought...

Let me know if you have any followups.

Frankx

Frankx

Okay - so the "reserve" account will actually be a "liability" account and you can set it up as follows:
1) Click on "Tools" > "Add Account" > "+ Other Assets & Liabilities" (this is a bottom tab) > "Liability;
2) Give the account a name (see my response above, but any name will work) and click the "Personal transactions" button > then Next;
3) Enter the "Date to start tracking" > for amount enter 0.00 > click Next;
4) Answer the "Loan" question by clicking the "No" button;
5) Click "Finish"

This will setup the account.

If you want to "revise" the entry you made for the last gift and recent purchase of the stereo, just:
1) go back to the entry you made to record the gift and change the category for that deposit to the account name you just setup;
2) go to the entry you recently made to record the stereo purchase and change the "category" from "Electronics" to the new account you created above.

But going forward for a new gift the entry will be:
Bank Account (that you deposit the funds into) (Dr)  $1,000,00
"Reserve Account"                                             (Cr.)                       $1,000.00

Frankx

Frankx

Oh, and in case I missed your question about "keeping the money separate" - by using the "reserve account', you are effectively keeping an accounting of the gift because if there is any balance in that account, it means that you have not spent that gift (or gifts).  You could also start a new bank account, if you wanted, but the "reserve account" actually makes a separate bank account redundant.

Frankx

p.s. - sorry, I just realized that you are a Mac user, so the steps I outlined above are actually Windows steps and they may not translate directly into the Mac steps.  Sorry for any confusion...

Tom Young

There are a couple of other approaches you might take here:

1st, since you receive the gift every year - sounds like Mom might be gifting the "annual exclusion" amount - why not simply budget for it along with all your other income items?  If you expect to receive it, why not budget for it?  If she happens not to give the gift to you, that's not the end of the world; nobody makes up a budget where every single line item works perfectly.  Then you simply account for your expenses and purchases as you usually would, so that receiver you bought does get expensed to the Electronics Category.

The advantage to this approach is that your Income and Expense reports - the report most people look at most closely - reflect  your actual receipts of income that includes Mom's gift, (or lack of gift if she doesn't make it), and your actual disbursements.  How much did you really spend on Electronics this year?  The answer to that question includes the receiver you bought and obscuring that fact by charging it to a "deferred revenue" Account makes the Income and Expense report less useful than it should be.

The other way of handling this if you don't want to budget for the gift or the money you spend that you somehow designate (mentally) is "from the gift" is to continue to show the receipt of the gift as you are, but then expense the purchases "from the gift" to the same "Personal Income: Gift Received" Category.  This way, every time you run an Income and Expense report the net amount shown in the Gift Received Category effectively shows "Money from Mom that I haven't spent yet."

Personally I'd take the 1st approach so that every time I reach into my pocket to buy something I don't have to somehow decide "is this 'Mom's' money I'm spending or my money?"  Generally money received is pretty darn fungible and you decide how you're going to spend it.

Frankx

Hi @Mychael M

One - top of the head - thought, would be to adjust the way you are reporting the gift as well as where you post the spending of the gift.

I can make a good argument that a gift really isn't really income at all.  Clearly it is not a payment for services you have provided, it isn't income from an investment, and its not taxable to you.  So you might consider simply entering it into a balance sheet account, which you could call "Gifts Reserve" or something else.  This keeps it out of your budget.  Then, when you buy something with those funds, you simply reduce the amount in that account.  This also let's you track those funds to make sure you actually buy things for yourself, which theoretically is what the donor wants you to do.  If you happen to spend more on that stereo system than the balance in the Gifts Reserve account, then that overage comes out of your "Electronics" category and this years budget.

Just a thought...

Let me know if you have any followups.

Frankx

Mychael M

Great suggestion, @Frankx . Thank you!

Frankx

You are welcome. Happy to help!

Frankx

Mychael M

@Frankx , I'm not sure how to start a "balance sheet account" within a bank account. I put the gift money into my savings, but want to keep it separate, like a savings within a savings.

Frankx

Okay - so the "reserve" account will actually be a "liability" account and you can set it up as follows:
1) Click on "Tools" > "Add Account" > "+ Other Assets & Liabilities" (this is a bottom tab) > "Liability;
2) Give the account a name (see my response above, but any name will work) and click the "Personal transactions" button > then Next;
3) Enter the "Date to start tracking" > for amount enter 0.00 > click Next;
4) Answer the "Loan" question by clicking the "No" button;
5) Click "Finish"

This will setup the account.

If you want to "revise" the entry you made for the last gift and recent purchase of the stereo, just:
1) go back to the entry you made to record the gift and change the category for that deposit to the account name you just setup;
2) go to the entry you recently made to record the stereo purchase and change the "category" from "Electronics" to the new account you created above.

But going forward for a new gift the entry will be:
Bank Account (that you deposit the funds into) (Dr)  $1,000,00
"Reserve Account"                                             (Cr.)                       $1,000.00

Frankx

Frankx

Oh, and in case I missed your question about "keeping the money separate" - by using the "reserve account', you are effectively keeping an accounting of the gift because if there is any balance in that account, it means that you have not spent that gift (or gifts).  You could also start a new bank account, if you wanted, but the "reserve account" actually makes a separate bank account redundant.

Frankx

p.s. - sorry, I just realized that you are a Mac user, so the steps I outlined above are actually Windows steps and they may not translate directly into the Mac steps.  Sorry for any confusion...

Mychael M

I think I translated to Mac-ese ok. Looks like it's working perfectly so far. I just opened a liability account which now shows up under "Debt" on my sidebar. I converted several expenses to show as transfers to that account and they no longer show up as expenses, which is exactly what I was trying to do. So far, so good! Thanks again, @Frankx !

Tom Young

There are a couple of other approaches you might take here:

1st, since you receive the gift every year - sounds like Mom might be gifting the "annual exclusion" amount - why not simply budget for it along with all your other income items?  If you expect to receive it, why not budget for it?  If she happens not to give the gift to you, that's not the end of the world; nobody makes up a budget where every single line item works perfectly.  Then you simply account for your expenses and purchases as you usually would, so that receiver you bought does get expensed to the Electronics Category.

The advantage to this approach is that your Income and Expense reports - the report most people look at most closely - reflect  your actual receipts of income that includes Mom's gift, (or lack of gift if she doesn't make it), and your actual disbursements.  How much did you really spend on Electronics this year?  The answer to that question includes the receiver you bought and obscuring that fact by charging it to a "deferred revenue" Account makes the Income and Expense report less useful than it should be.

The other way of handling this if you don't want to budget for the gift or the money you spend that you somehow designate (mentally) is "from the gift" is to continue to show the receipt of the gift as you are, but then expense the purchases "from the gift" to the same "Personal Income: Gift Received" Category.  This way, every time you run an Income and Expense report the net amount shown in the Gift Received Category effectively shows "Money from Mom that I haven't spent yet."

Personally I'd take the 1st approach so that every time I reach into my pocket to buy something I don't have to somehow decide "is this 'Mom's' money I'm spending or my money?"  Generally money received is pretty darn fungible and you decide how you're going to spend it.

Mychael M

@Tom Young thank you for your ideas!