Guide to Grant Accounting for Nonprofit Organizations

accounting for grants

The nature of the grant determines which accounting approach must be used, for example, capital or income approaches. To effectively manage grants, it is essential to know about the different types of grants and what each entails. You can assign each transaction in
QuickBooks to a class to track revenue and expenses for a specific program regardless of the chart of accounts. With accounting for grants classes, you may have one set of general ledger accounts and separate by classes based on specific programs, grants, or donors. A company recognises a government grant when it has reasonable assurance that it will comply with the relevant conditions and the grant will be received. Part of accepting a grant means generating reports about how your organization uses the money.

accounting for grants

Donor-restrictions should not be confused with conditions as mentioned above and instead are grants where a restriction exists that limits the use of the assets received. These restrictions may permanently limit the use of the asset received, stipulate the assets be used at a particular point in time, or be specific for a particular purpose or program. Any amounts not used in the year they are received are recognized as with donor restrictions at yearend and disclosed in your financial statements. To ensure that all your accounts are balanced and accurate, and that all your grant money is accounted for properly, nonprofit fund accounting software is highly recommended. Aplos Software was designed for nonprofits and their unique accounting needs. Nonprofits are required to use the accounting standards set by the FASB (Financial Accounting Standards Board), and Aplos has them built in to its cloud-based software.

Best Practices When Accounting For Grants

You prepare invoices and requests for payments to funding agencies and reconcile grant expenses. You identify issues relating to the grants and communicate with the grant compliance manager and program officers. Companies that have not received government grants previously may need to develop new accounting policies and procedures.

A business grant can be enormously helpful for a small business, but you must record it carefully, just like any other source of income. Accounting for grant money is slightly different from accounting for other similar investments, and business owners should be aware of those differences. To qualify as income, the grant must be used for the purpose for which it was awarded. IAS 20 does not stipulate whether the conditions of the grant must be met for an entity to recognize the grant.

About the IFRS Foundation

Furthermore, the government does not expect any repayment in case of such grants. Therefore, such government grants are credited to the shareholders’ funds. These government grants are sometimes referred to as subsidies, cash incentives, duty drawbacks etc. You must submit a well-prepared and compelling proposal that demonstrates the impact of your organization’s work and how it aligns with the grantor’s priorities. By taking the time to research and prepare a strong proposal, you can increase your chances of securing the funding your nonprofit requires.

At first glance, accounting for government grants may appear to be relatively straightforward. However, in practice, a number of challenges can arise, some of which we consider here. Establishing sound internal controls is essential for ensuring the financial security, accuracy, and completeness of your records related to grants. This includes having a separate bank account for grant funds, segregating duties among different team members, and having adequate documentation of all grant-related transactions. Grants are the lifeblood of nonprofits, giving them the much-needed cash injection to market the organization, fund a project, or get an initiative off the ground. Having a full grant pipeline increases your nonprofit’s chances of success and improves your visibility and credibility.

Reporting on the Grant Funds Your Nonprofit Receives

By understanding the different types of grants and accounting principles, NFPs can better manage their finances and identify new funding opportunities. By following the tips mentioned above, NFPs can increase their chances of securing grants and effectively use funds to achieve their mission’s goals. The deferred income approach is used when government grants pertain to depreciable assets. These grants are treated as deferred income and allocated in proportion to depreciation on related assets. The grant is recognized in the statement of activities over the useful life of the asset. Grant accounting for nonprofits is the method of  recording and monitoring government grants in your accounting system.

  • This means having effective systems and processes in place for tracking grant expenditures, documenting grant-related activities, and making sure all expenses are properly classified.
  • Use emotive language to evoke an emotional response in the person assessing proposals for a short-list.
  • If a grant is determined to be unconditional, revenue is recognized when the grant is received.
  • If a government grant meets the recognition criteria, IAS 20 generally allows either gross or net presentation on the balance sheet and/or income statement.

It is important to keep in mind that grant funds must be used for their intended purpose and in accordance with all applicable laws and regulations. Grants should not be used in any way that could be perceived as fraudulent or unethical. As the grant recipient, you are responsible for understanding and following all applicable laws and regulations.

Objective of IAS 20

It’s also simple to learn, and you don’t need an accounting degree to use it. The application process takes hard work, and there is often a lot of competition. There are many resources regarding the grant application process but very few on how to account for and track a grant after you receive it. If your nonprofit organization receives a grant, you will need to demonstrate accountability for how that money is spent, which means you will need to use fund accounting to track those dollars.

  • You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies.
  • Some people may call it nonprofit account, but this applies for non dilutive equity providers, university transfer office companies, SBIR grants (NIH, DOD, DOE, etc.), and other for profit organizations.
  • Legal and contractual considerations typical of the government environment are reflected in the fund structure basis of accounting.
  • If your organization depends on grants, grant accounting should be on your radar.
  • Having a full grant pipeline increases your nonprofit’s chances of success and improves your visibility and credibility.
  • You can work together to ensure everything is correct as per instructions.

Such a deferred income is recognized in the P&L statement over the useful life of the asset on a systematic and rational basis. Now, the primary condition for an enterprise qualifying for such a grant is that it should purchase, construct or otherwise acquire such assets. Working with an accounting partner and utilizing grant accounting tools like Sage Intacct can streamline the grant process and maximize their impact.