Accounting for Crowdfunding: A Practical Approach with Proposed Journal Entries
Crowdfunding is a trending and emerging concept that is an alternative way of raising funds for any project. As this method of fundraising gains momentum, it presents unique challenges and opportunities for financial reporting and accountability. This article explores the accounting implications of various crowdfunding models, like donation-based, reward-based, debt-based, and equity-based. The study aims to suggest a prospective accounting treatment for crowdfunding.
Introduction
Crowdfunding is an alternative way of raising funds for innovative, entrepreneurial, and creative projects, startups, and social causes, which provide funds at a lower cost and in less time. The project must be well planned for its success. Funds are raised from crowdfunding with the help of crowdfunding websites, which provide an online platform for investors and borrowers (Gedar & Lodha, 2024). Accounting for crowdfunding transactions is a difficult task. Crowdfunding is a new concept, and there are no clear guidelines regarding its accounting in India yet. There are four types of crowdfunding, and the accounting treatment varies for each type.
This study is exploratory in nature. It is found that various countries are in the process of developing a dedicated accounting standard for this purpose. Yet, no country is able to provide complete guidance for accounting for various types of crowdfunding transactions. This is a unique attempt to provide accounting guidance for crowdfunding transactions.
Accounting of crowdfunding is important for both the lender and the borrower because it involves the exchange of funds and returns. Accounting for crowdfunding transactions is essential to ensure appropriate financial reporting, compliance with legal regulations, and transparency for stakeholders.
Challenges in Accounting for Crowdfunding
Accounting for crowdfunding presents significant challenges due to its diverse models and evolving regulatory landscape. Donation-based and reward-based crowdfunding complicate revenue recognition, liability classification and regulatory compliance. Donations often lack enforceable obligations, while unfulfilled rewards generate contingent liabilities. Debt-based crowdfunding requires accurate treatment of interest, repayments, and disclosure. Equity-based crowdfunding necessitates valuation, regulatory adherence, and shareholder tracking. The absence of standardized accounting guidelines leads to inconsistencies in financial reporting. Fundraisers failing to deliver promised outcomes may face issues of unearned revenue and potential refunds. Moreover, stakeholders demand transparent disclosures on fund utilization and project progress, further intensifying accounting complexities.
Accounting Standards and Crowdfunding
So far, there is no dedicated accounting standard for crowdfunding in any of the countries. Based on the type of crowdfunding, one can apply the provisions of the relevant applicable accounting standard. Equity-based and debt-based crowdfunding fall within the definition of financial instruments. Accordingly, they should be accounted for in line with their respective nature under IFRS 9 Financial Instruments and IAS 32 Financial Instruments: Presentation. Similarly, accounting of reward-based crowdfunding can be done as per IFRS 15 Revenue from Contracts with Customers because in reward-based crowdfunding, a contract is made with the customer, which is similar to the nature of IFRS 15. For donation-based crowdfunding, no present accounting standard is applicable for its accounting. In spite of the identification of relevant accounting standards, no standard specifies accounting treatment of crowdfunding transactions.
Accounting Treatment for Different Types of Crowdfunding
There are three major issues related to accounting for crowdfunding transactions: the accounting for the amount raised, accounting for expenses made on fundraising, and accounting for the refund of the amount raised. The type of crowdfunding determines how it is treated in accounting. Generally, the amount raised through crowdfunding is initially deposited in an escrow account or a separate account of the platform to ensure legal compliance and investors' protection. After verification and completion of formalities, this amount is either transferred to the account of the fundraiser (company) or a refund is made. For the amount raised on crowdfunding, the platform debits its bank account and, based on the type of crowdfunding credits, either "Investor Payable" (equity-based and debt-based CF) or "Backers" (reward or donation-based CF) account. When the platform returns the money to investors or backers for some reason, a reverse entry is made. When the money is sent to the company on a successful campaign, the entry remains the similarly the funds are going out. On receipt of money, the company debits the bank account and, based on the type of crowdfunding, credits the share capital account (equity-based CF) or loan payable (debt-based CF) or deferred revenue account (reward-based CF), or the Donation revenue account (donation-based CF).
For expenses made by a fundraiser company on crowdfunding, again, accounting treatment will be based upon the type of crowdfunding. For equity crowdfunding, expenses may be categorised into direct and indirect costs. While direct costs include platform fees, payment processing fees, legal fees, etc., indirect costs include marketing, advertising, and administration expenses. Direct costs should be debited to or deducted from the securities premium account, whereas indirect costs should be debited to the Income Statement. For debt-based, reward-based or donation-based crowdfunding, all expenses related to crowdfunding should be debited to the Income Statement as Financing Costs or operating expenses, respectively. An additional entry is required for reward-based crowdfunding when goods are delivered by debiting the Cost of Goods Sold account and crediting the Inventory account.
For accounting of the refund of the amount raised through crowdfunding, the entry made at the time of receipt of money is reversed. Generally, a refund is due when there is over-subscription or when the campaign is unsuccessful. Based on the type of crowdfunding, the necessary account will be debited from crediting bank account.
Research Problem and Gap
Despite the growing relevance of crowdfunding, there is a noticeable lack of accounting guidance on how to recognize, classify, and disclose such transactions. This absence of standardized frameworks compromises consistency, comparability, and transparency in financial reporting. Existing literature has primarily focused on the legal, technological, or marketing aspects of crowdfunding, while the accounting domain remains underexplored.
Research Methodology
This article studies an exploratory research design, aiming to propose journal entries for various crowdfunding models based on general accounting principles and applicable international standards. Data has been synthesized through a review of relevant literature and hypothetical case scenarios to illustrate proposed accounting treatments.
Objective of the study
To suggest prospective accounting practices for crowdfunding. Examples for Accounting Treatment for various types of Crowdfunding have been presented below: -
Accounting for Equity-Based Crowdfunding
Example 1: X Ltd. raised funds through the 'Crowdcube' equity-based crowdfunding platform. Pass the journal entries in the books of the fundraiser and platform for the following crowdfunding transactions: -
| Date | Particulars | Amount (₹) |
|---|---|---|
| 2022 Apr 21 | A company raises funds via an equity-based crowdfunding platform with a 10% premium, and fund is received by the platform. | 1,10,000 |
| Apr 23 | The company spends on professional services (e.g., administrative, marketing) to set up the crowdfunding campaign. | 4,000 |
| May 21 | Campaign fund is transferred to X Ltd. The platform charges a 5% fee, deducted from the total funds raised. | 1,10,000 |
| 2023 Jul 1 | The company declares in dividends to be paid to equity-based crowdfunding investors. | 10,000 |
| Jul 15 | The company pays the declared dividends to investors. | 10,000 |
Solution: Journal Entries for Equity Crowdfunding
| Date | Journal of Fundraiser Company (X Ltd.) | Journal of CF Platform (Crowdcube) | ||||||
|---|---|---|---|---|---|---|---|---|
| Particulars | L. F. | Debit (Dr.) | Credit (Cr.) | Particulars | L. F. | Debit (Dr.) | Credit (Cr.) | |
| 2022 Apr 21 | Bank A/c Dr. To Investor Payable A/c (Received funds from backers) | 1,10,000 | 1,10,000 | |||||
| Apr 23 | Crowdfunding Expenses A/c Dr. To Bank A/c (Paid for indirect expenses related to campaign) | 4,000 | 4,000 | |||||
| May 21 | Crowdcube's A/c Dr. To Share Application A/c (Amount due from Platform) | 1,10,000 | 1,10,000 | Investor Payable A/c Dr. To X Ltd. A/c (Amount due to X Ltd.) | 1,10,000 | 1,10,000 | ||
| May 21 | Bank A/c Dr. Platform Fees A/c Dr. To Crowdcube's A/c (Being funds received from platform after deducting platform fees) | 1,04,500 5,500 | 1,10,000 | X Ltd. A/c Dr. To Bank A/c To Revenue A/c (Platform fees) (Being funds transferred after deducting platform fees) | 1,10,000 | 1,04,500 5,500 | ||
| May 21 | Share Application A/c Dr. To Share Capital A/c (Par value) To Securities Premium A/c (Being funds transferred to capital account) | 1,10,000 | 1,00,000 10,000 | |||||
| 2023 Mar 31 | Securities Premium A/c Dr. To Platform Fees A/c (Charging of platform fees from securities premium) | 5,500 | 5,500 | Profit & Loss A/c Dr. To Revenue A/c (Transfer of Revenue to P&L A/c) | 5,500 | 5,500 | ||
| Mar 31 | Profit & Loss A/c Dr. To Crowdfunding Exp. A/c (Charging of other expenses from P&L A/c) | 4,000 | 4,000 | |||||
| Jul 1 | Profit & Loss A/c Dr. To Dividend Payable A/c (Being declaration of dividend) | 10,000 | 10,000 | |||||
| Jul 15 | Dividend Payable A/c Dr. To Bank A/c (Being payment of dividend) | 10,000 | 10,000 | |||||
Note: According to section 52 of the Companies Act, 2013, securities premium can be used for the writing off the expenses of or the commission paid or discount allowed on, any issue of shares or debentures of the company. Crowdfunding platform fees are also an expense related to issuing shares, hence it can be written off from the securities premium, which is received in equity-based crowdfunding.
Accounting for Debt-Based Crowdfunding
Example 2: Y Ltd. raised funds through the 'Catapooolt' debt-based crowdfunding platform. Pass the journal entries in the books of fundraiser and platform for the following crowdfunding transactions:
| Date | Particulars | Amount (₹) |
|---|---|---|
| 2022 Jun 30 | A company raises fund via a debt-based crowdfunding platform and fund is received by platform | 1,00,000 |
| Jul 1 | The company paid for professional services (e.g., administrative, marketing) to set up the crowdfunding campaign. | 2,000 |
| Jul 30 | Campaign's funds are transferred to Y Ltd. The platform charges a 5% fee, which is deducted from the total funds raised. | 1,00,000 |
| 2023 Jan 1 | Interest accrues on the loan for the period. | 10,000 |
| Jan 1 | Payment of interest on the loan for the period. | 10,000 |
Solution: Journal Entries for Debt Crowdfunding
| Date | Journal of Fundraiser Company (Y Ltd.) | Journal of CF Platform (Catapooolt) | ||||||
|---|---|---|---|---|---|---|---|---|
| Particulars | L. F. | Debit (Dr.) | Credit (Cr.) | Particulars | L. F. | Debit (Dr.) | Credit (Cr.) | |
| 2022 Jun 30 | Bank A/c Dr. To Investor Payable A/c (Received funds from backers) | 1,00,000 | 1,00,000 | |||||
| Jul 1 | Crowdfunding Exp A/c Dr. To Bank A/c (Paid for marketing expenses related to campaign) | 2,000 | 2,000 | |||||
| Jul 30 | Catapooolt's A/c Dr. To Loan Application A/c (Amount due from Platform) | 1,00,000 | 1,00,000 | Investor Payable A/c Dr. To Y Ltd. A/c (Amount due to Y Ltd.) | 1,00,000 | 1,00,000 | ||
| Jul 30 | Bank A/c Dr. Financial Cost A/c Dr. To Catapooolt A/c (Being fund received through platform after deducting platform fees) | 95,000 5,000 | 1,00,000 | Y Ltd. A/c Dr. To Revenue A/c (Platform fees) To Bank A/c (Being deducted platform fees and transferring funds to fundraiser) | 1,00,000 | 5,000 95,000 | ||
| Jul 30 | Loan Application A/c Dr. To Loan Payable A/c (Loan amount transferred to Loan Payable A/c) | 1,00,000 | 1,00,000 | |||||
| 2023 Jan 1 | Financial Cost A/c Dr. To Interest Payable A/c (Being interest accrued on loan) | 10,000 | 10,000 | |||||
| Jan 1 | Interest Payable A/c Dr. To Bank A/c (Being repayment of the loan principal and interest) | 10,000 | 10,000 | |||||
| Mar 31 | Profit & Loss A/c Dr. To Crowdfunding Exp. A/c To Financial Cost A/c (Financial costs transferred to P&L A/c) | 17,000 | 2,000 15,000 | Profit & Loss A/c Dr. To Revenue A/c (Transfer of Revenue to P&L A/c) | 5,000 | 5,000 | ||
Accounting for Reward-Based Crowdfunding
Example 3: Z Ltd. raised funds through the 'Patreon' reward-based crowdfunding platform. Pass the journal entries in the books of fundraiser and platform for the following crowdfunding transactions:
| Date | Particulars | Amount (₹) |
|---|---|---|
| 2022 May 1 | A company receives fund in crowdfunding contributions from backers for rewards yet to be delivered and fund is received by the platform. | 50,000 |
| May 5 | Expenses related to the crowdfunding campaign. | 1,000 |
| May 15 | The company spends on advertising and promotional activities for the crowdfunding campaign. | 5,000 |
| Jun 1 | Transfer of the campaign's funds to Z Ltd. The crowdfunding platform charges a 5% fee before transferring funds to the company. | 50,000 |
| Oct 1 | The company spends on producing the promised rewards. | 20,000 |
| 2023 Jan 1 | The company delivers all promised rewards, fulfilling its obligations. The previously recorded as Unearned Revenue is now recognized as revenue. | 50,000 |
| Jan 1 | The company spends on shipping the rewards to backers. | 3,000 |
| Jan 31 | After fulfilling backer rewards, the worth of unsold inventory remains. | 2,000 |
Solution: Journal Entries for Debt Crowdfunding (Note: Refers to Reward Crowdfunding per context)
| Date | Journal of Fundraiser Company (Z Ltd.) | Journal of CF Platform (Patreon) | ||||||
|---|---|---|---|---|---|---|---|---|
| Particulars | L. F. | Debit (Dr.) | Credit (Cr.) | Particulars | L. F. | Debit (Dr.) | Credit (Cr.) | |
| 2022 May 1 | Bank A/c Dr. To Backers' A/c (Received funds from backers) | 50,000 | 50,000 | |||||
| May 5 | Crowdfunding Expenses A/c Dr. To Bank A/c (Paid for expenses related to crowdfunding campaign) | 1,000 | 1,000 | |||||
| May 15 | Crowdfunding Expenses A/c Dr. To Bank A/c (Paid for advertising expense) | 5,000 | 5,000 | |||||
| Jun 1 | Patreon A/c Dr. To Unearned Revenue A/c (Being amount due from platform) | 50,000 | 50,000 | Backers' A/c Dr. To Z Ltd. (Being amount due to Z Ltd.) | 50,000 | 50,000 | ||
| Jun 1 | Bank A/c Dr. Platform Fees A/c Dr. To Patreon A/c (Being funds transferred from platform) | 47,500 2,500 | 50,000 | Z Ltd. A/c Dr. To Revenue A/c (Platform fees) To Bank A/c (Being deducted platform fees and transferred funds to fundraiser) | 50,000 | 2,500 47,500 | ||
| Oct 1 | Production Cost A/c Dr. To Bank A/c (Being cost of manufacturing the rewards is recognized as an expense) | 20,000 | 20,000 | |||||
| 2023 Jan 1 | Unearned Revenue A/c Dr. To Revenue A/c (Being delivery of rewards) | 50,000 | 50,000 | |||||
| Jan 1 | Shipping Fees A/c Dr. To Bank A/c (Being charge shipping costs) | 3,000 | 3,000 | |||||
| Jan 31 | Inventory A/c Dr. To Production Cost A/c (Being excess inventory is recorded as an asset) | 2,000 | 2,000 | |||||
| Mar 31 | Profit & Loss A/c Dr. To Crowdfunding Expenses A/c To Platform Fees A/c To Production Cost A/c To Shipping Fees A/c (Expenses transferred to P & L A/c) | 29,500 | 6,000 2,500 18,000 3,000 | |||||
Accounting for Donation-Based Crowdfunding
The International Accounting Standards Board (IASB) does not have an international accounting standard for non-profit Organisations. However, not-for-profit organizations (NPOs) that are not controlled by the government can use the accounting standards for NPOs in Part III of the IAS plus handbook or the IFRS (International Financial Reporting Standards) in Part I of the handbook.¹
Example 4: An NGO raised funds through the 'Ketto' donation-based crowdfunding platform. Pass the journal entries in the books of the fundraiser and platform for the following crowdfunding transactions: -
| Date | Particulars | Amount (₹) |
|---|---|---|
| 2022 Apr 15 | A donor contributes in a crowdfunding campaign, and fund is received by the platform. | 60,000 |
| Apr 16 | A freelancer is paid for designing the campaign's promotional video. | 1,200 |
| Apr 17 | Paid as salaries for project staff involved in managing the crowdfunding campaign and project execution. | 4,000 |
| Apr 18 | Other expenses related to the crowdfunding campaign. | 1,000 |
| Apr 19 | Paid for social media advertising to promote the crowdfunding campaign. | 2,000 |
| May 15 | Funds of campaigns are transferred to the NGO. Crowdfunding platform charges 3% for facilitating donations. | 60,000 |
Solution: Journal Entries for Donation-based Crowdfunding
| Date | Journal of Fundraiser (NGO) | Journal of CF Platform (Ketto) | ||||||
|---|---|---|---|---|---|---|---|---|
| Particulars | L. F. | Debit (Dr.) | Credit (Cr.) | Particulars | L. F. | Debit (Dr.) | Credit (Cr.) | |
| 2022 Apr 15 | Bank A/c Dr. To Backers' A/c (Received funds from backers) | 60,000 | 60,000 | |||||
| Apr 16 | Crowdfunding Expenses A/c Dr. To Bank A/c (Paid for campaign design) | 1,200 | 1,200 | |||||
| Apr 17 | Crowdfunding Expenses A/c Dr. To Bank A/c (Paid salary to project staff) | 4,000 | 4,000 | |||||
| Apr 18 | Crowdfunding Expenses A/c Dr. To Bank A/c (Paid for expenses related to crowdfunding campaign) | 1,000 | 1,000 | |||||
| Apr 19 | Crowdfunding Expenses A/c Dr. To Bank A/c (Paid for social media advertising) | 2,000 | 2,000 | |||||
| May 15 | Ketto's A/c Dr. To Donation Revenue A/c (Being Amount due from platform) | 60,000 | 60,000 | Backers' A/c Dr. To NGO's A/c (Being amount due to NGO) | 60,000 | 60,000 | ||
| May 15 | Bank A/c Dr. Platform Fees A/c Dr. To Ketto's A/c (Being donation received net of platform fees) | 58,200 1,800 | 60,000 | NGO's A/c Dr. To Revenue A/c (Platform fees) To Bank A/c (Being deducted platform fees and transferred funds to NGO) | 60,000 | 1,800 58,200 | ||
| 2023 Mar 31 | Profit & Loss A/c Dr. To Crowdfunding Expenses A/c To Platform Fees A/c (Crowdfunding expenses transferred to P & L A/c) | 10,000 | 8,200 1,800 | |||||
Accounting for Crowdfunding Platform
Example for Accounting of Crowdfunding Platform: There may be some specific transactions for crowdfunding platforms. Their accounting treatment can be understood by following the example.
Example 5: Pass the journal entries in the books of crowdfunding platform 'Kickstarter' for the following crowdfunding transactions: -
| Date | Particulars | Amount (₹) |
|---|---|---|
| 2022 Apr 15 | Funds pledged by backers, but not yet transferred to the campaign creator. | 50,000 |
| Apr 15 | Net amount is transferred to campaign creators after the deducted platform charges a fee @ 5%. | 2,500 |
| May 1 | Operating expenses, such as hosting fees or employee salaries. | 10,000 |
| Jul 15 | Funds held in escrow earn interest before being distributed. | 5,000 |
| Aug 1 | Funds are refunded to backers due to a campaign failing to meet its goal. | 30,000 |
Solution: Journal of Kickstarter (Platform)
| Date | Particulars | L.F. | Debit (Dr.) | Credit (Cr.) |
|---|---|---|---|---|
| 2022 Apr 15 | Bank A/c Dr. To Backer's/Investor Payable A/c (Being received funds from backers) | 50,000 | 50,000 | |
| Apr 15 | Backer's/Investor Payable A/c Dr. To Revenue A/c (Platform fees) To Bank A/c (Being deducted platform fees and transferring funds to the fundraiser) | 50,000 | 2,500 47,500 | |
| May 1 | Operating Expenses A/c Dr. To Bank A/c (Being paid platform operating expenses, like hosting fees or employees' salaries etc.) | 10,000 | 10,000 | |
| Jul 15 | Bank A/c Dr. To Backer's/Investor Payable A/c (Being received funds from backers) | 5,000 | 5,000 | |
| Aug 1 | Backer's/Investor Payable A/c Dr. To Bank A/c (Being refund to backers due to the campaign failed) | 30,000 | 30,000 |
Conclusion
The study presents significant accounting issues related to crowdfunding transactions. In a crowdfunding process, both the crowdfunding platform and the fundraiser face the problem of accounting for crowdfunding transactions. Various countries are in the process of developing a dedicated accounting standard for this purpose. Yet, no country is able to provide complete guidance for accounting for various types of crowdfunding transactions. Hence, an attempt has been made to summarize the significance accounting challenges for crowdfunding and a review of the current accounting standards of various countries. Also, some hypothetical examples pertaining to the four types of crowdfunding have been provided along with journal entries to be done in the books of both the parties (the fundraiser and platform).
References
- Gedar, B. L., & Lodha, S. (2024). Crowdfunding as a source of finance in India: An empirical study. IUP Journal of Applied Finance, 30(1), 25-41.
- IFRS 9 issued by International Accounting Standard Board.
- IFRS 15 issued by International Accounting Standard Board.
- IAS 32 issued by International Accounting Standard Board.
- https://www.linkedin.com/pulse/accounting-crowdfunding-tom-clendon/
- https://www.icai.org/
- https://www.ifrs.org/