You want to start a company and heard it’s easy to get money from Kickstarter. But where do you record the $20,000 in your accounting system?
It’s Not Shareholder Equity
First of all, Kickstarter funds cannot be used as investment dollars, so the $20,000 cannot be recorded as equity.
It’s Not Long-Term Debt
Typically, when you apply for Kickstarter funding, you state you are promising to give something back in return for the investment.. So, in some ways, when you accept funding, you are creating liability, i.e., the obligation to “pay back” the backers with whatever you have promised them. But it is not quite a loan because there is no interest and no legal instrument that you must repay. So, the $20,000 cannot be recorded as a typical long-term debt.
Is it Revenue?
According to http://outright.com/blog/accounting-for-crowd-funding-what-you-need-to-know-before-starting-a-kickstarter-campaign/, the IRS might consider funding from Kickstarter to be taxable income! After all, these people are paying money to the company with the expectation that they will receive a product in return.
Could be Deferred Revenue
That sounds like revenue! Actually, it is more like unearned income (aka deferred revenue, which is a liability) because you have not yet delivered the product. The unearned income only becomes revenue when you deliver the product to the customer.
If I were considering Kickstarter funding, I’d start by asking my accountant how to record the events. If you were penny wise and pound foolish and wanted to avoid paying an accountant, I’d play it safe and record the transaction as a credit to your Unearned Income (liability) account and a debit (i.e., a deposit) to your Checking/Bank (cash) account.
Then when you deliver product to your Kickstarter supporters, I’d record each transaction as a debit to your Unearned Income (liability) account and a credit to your Revenue account. But I’m not an accountant!
I don’t know how most recipients of Kickstarter funds are accounting for the funds on their books, but I suspect that most are so happy to receive the funds that they haven’t thought about it much, and most haven’t asked their accountants. I recommend that you do! You really don’t want to spend all that money and then receive a surprise letter from the IRS.
Al Davis is a serial entrepreneur currently in his fifth startup. He is also an angel investor and the author of six books. He is not a CPA or an attorney, so the above is just his personal opinion!