Goods given as charity are products or services given away by a business for charitable purposes.
The business donates the goods to the charity free of charge and therefore there is no associated sales value. Consequently the goods cannot be recorded in the accounting records under the heading of sales.
However the goods do have a cost which needs to be removed from the cost of sales account and recorded as an expense such as charity expense or charitable donations.
Goods Given as Charity Example
To illustrate suppose a business donates products to a charity free of charge. The goods have no sale value but have cost the business 500 to purchase. In order to reflect the goods given as charity the business records the following bookkeeping journal entry to transfer the cost of the goods from the purchases account to a charitable expense account.
| Account | Debit | Credit |
|---|---|---|
| Charity expense | 500 | |
| Purchases | 500 | |
| Total | 500 | 500 |
Journal Entry for Goods given as Charity Explained
Debit Entry
Firstly the debit entry represents the cost of the goods given by the business. The business records the amount under the heading of charity expenses.
Credit Entry
In this example we assume that the business operates a periodic inventory system. Consequently in this case the credit entry reduces the purchases expense which in turn removes the cost of the goods given as charity from the cost of sales account.
In contrast it should be noted that in a perpetual inventory system the credit entry would be direct to the inventory account.
The Accounting Equation
The accounting equation, Assets = Liabilities + Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business. Furthermore this is true at any time and applies to each transaction.
The accounting equation for the goods given as charity transaction is shown in the following table.
In this example purchases has decreased by 500 which increases the net income, retained earnings and equity. Additionally charity expenses have increased by 500 which decreases the net income, retained earnings and equity. The net effect on equity of the two entries is zero.
It is important to realize that the transaction is simply a reallocation of a cost from cost of sales (purchases) to charity expenses.
Popular Double Entry Bookkeeping Examples
This charity journal entry is one of many bookkeeping entries used in accounting. Discover another at the links below.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.