What is grant accounting? A guide to nonprofit grant management

If you’re a nonprofit, staying on top of your grants is a crucial way to make sure your day-to-day operations function effectively.

Grant accounting is essential for any nonprofit’s financial health.

When your team effectively tracks cash inflows from donations, it helps ensure your financial statements stay clear and accurate, making it easier to meet regulatory requirements and build trust with stakeholders.

While accounting for grants can be complex, this guide to grant accounting simplifies the process with practical tips to help your finance team improve efficiency and effectiveness.

Keep reading to find out more.

Here’s what we’ll cover

What is grant accounting?

To grasp the concept of grant accounting, it’s helpful to start by defining what we mean by “grants” and how they function within a nonprofit context.

Grants are sums of money given to a nonprofit, often from a government agency, to help the nonprofit achieve its goals and objectives.

Grants can come in many forms, such as government grants and research grants.

Grant accounting is all about tracking the funds that come into a nonprofit through grants and monitoring how they are spent.

Grant accountants also help to manage these funds, by completing audits and assessments, and producing nonprofit financial statements.

Why is grant accounting for nonprofits important?

For nonprofits, keeping a close eye on how grant money is spent is key to making a real impact.

Accurate grant accounting helps ensure that funds are used wisely and sustainably, giving your organization the confidence that every dollar is making a difference.

Not only is grant accounting important for your organization, but it’s also vital for the grantors who donate the funds.

Grantors typically attached strict guidelines and rules for how their contributions can be used.

Accurate grant accounting means you can show grantors the nonprofit is compliant with any requirements.

It might show, for instance, that the funds are being spent on a specific project or specific materials.

Without being able to prove this compliance, it’s possible that a nonprofit risks fines or penalties.

If a nonprofit wants to be sustainable over the long term, this compliance is vitally important.

Transparent and accurate accounting records allow potential grantors and donors to see that the nonprofit is being run sensibly.

This will help to persuade them to invest funds into future projects.

The benefits of perfecting the grant accounting basics

Learning the fundamentals of grant accounting can seem daunting if you’re coming from a different financial background or are new to managing grants.

You’ll need to navigate nonprofit-specific regulations and adapt to accounting practices tailored for grants.

However, mastering these basics offers significant advantages for nonprofits.

Equipping your finance team with a strong understanding of grant accounting is key.

Here are the main benefits of nonprofit grant accounting:

Regulatory compliance

Given that nonprofits tend to have access to public funds, there’s no surprise that there are stringent regulations to be followed.

These regulations, such as the IRS’s annual filing rules, can include reporting deadlines, levels of expenditure, and standardized documentation around grant revenue recognition.

Failing to comply with legal regulations can have a significant impact on any nonprofit organization: it can lead to a nonprofit losing its tax-exempt status, eligibility for future funds or receiving penalties.

One of the reasons this should be handled by someone with expertise in grant accounting is because different government departments have different reporting guidelines.

This means that receiving a grant from the Department of Defence, for instance, will bring a unique set of regulatory demands.

Better relationships with grantors

Establishing strong relationships with grantors is crucial to help nonprofit operations sustain.

These funders will want to see that their money is being used for the mission they support.

This is impossible without an accurate and timely approach to grant accounting.

With the confidence in the nonprofits’ financial health and transparency, existing grantors are more likely to donate funds for future initiatives.

Happy grantors will also recommend new donors or funders to support the nonprofits.

Stronger financial management

Nonprofits need to have the same level of strong financial management as for-profit enterprises.

This means the organization gets the most out of every bit of funding it receives, propelling it closer to its mission aims.

Ultimately, this is impossible without detailed accounting records about the use of grant funds.

Up-to-date and accurate information about the management of grant funds gives an indispensable insight into the organization’s expenses and general financial viability, as well as the financial efficiency of individual programs and investments.

High levels of accountability

Alongside strong financial management comes accountability.

Nonprofits have a lot of highly interested stakeholders, such as board members and funders.

Stakeholders want to make sure the organization’s funds are being invested as effectively as possible.

A large part of grant accounting is about ensuring that expenses are recorded, itemized, and clearly linked to the outcomes they achieved.

This creates a paper trail, allowing funders to assess the return on investment (ROI) of their grants and hold leaders to account for the proper use of their funds.

Data-driven decision making

Trying to achieve effective large-scale planning and budgeting without the insights created by grant accounting is the same as going blindfolded.

When you collect the data that’s needed for grant bookkeeping, the organization will be able to analyze that data to assess the intent, implementation, and impact of its policies and strategies.

Your leaders will have a wealth of centralized information that can inform future strategic planning.

Let’s say that a nonprofit has a program to deliver low-cost housing to low-income communities.

Your grant accounts might show that a certain supplier provides houses at a lower cost per unit than an alternative, helping your company choose which supplier to go with in future.

This is exactly the sort of data-driven decision making that turns nonprofits into effective and sustainable organizations, achieving a real impact.

Access to new funding opportunities

Finally, perfecting grant accounting methods will open up new avenues for funding opportunities.

This can come from building strong relationships with your existing grantors.

Existing customers will be more likely to recommend your nonprofit to others if they view your organization as responsible and transparent.

This can also come as you build your profile as an organization through effective financial leadership.

Grant accounting lets you use data to prove ROI, which will be invaluable when pitching to potential grantors.

Similarly, as you use data-driven decision-making to refine your implementation, your stronger results will draw in new funds.

Types of grants for nonprofits

Before you start thinking about how to manage grants for nonprofit organizations, you’ll need to know the types of grants that nonprofits work with on a regular basis.

These can be divided into three basic categories:

• Unconditional: These funds are given to nonprofits without any conditions for the organization to follow.
• Conditional: These grants include specific rules that limit how they can be spent. A common condition is that the funder will give the grant once the organization has collected the same funds from elsewhere, called a matching grant.
• Reimbursable: These funds are given to an organization once a specific project has been completed. The nonprofit must fund the upfront expenses but they are then reimbursed by the grantor.

The origin and purpose of grants also play an important role in determining the appropriate accounting procedures.

These factors often influence reporting requirements and compliance:

Government grants

Government grants are financial assistance from government departments or bodies to nonprofits.

They aim to support programs that are closely linked to the public interest.

If you’re a nonprofit in education, healthcare or infrastructure, it’s highly likely that you’ll be primarily working with government grants.

Private foundation and corporation grants

Many nonprofit organizations also rely on funds donated by private individuals or institutions, such as foundations or corporations.

An example of this is the Bill and Melinda Gates Foundation, which donates grants to global nonprofits focused on poverty.

Corporate grants are slightly different: they’re donations from for-profit companies.

Research grants

If you’re a nonprofit producing scientific or academic research, you might also receive research grants.

These are closely linked to research projects, helping to fund activities such as experimentation design and data collection.

Research grants usually come with specific and rigorous requirements, which reflect the fact that they’re intended to fund research projects.

You’ll probably have to submit research proposals as well as undergo peer review and publication processes.

Project, operating, and capacity-building grants

These three grants are specifically linked to different processes, all of which are crucial to the operations of any nonprofit.

• Project grants are funds that pay for specific projects and are intended to produce a clear set of outcomes.
• Operating grants are used to pay for the day-to-day operations of a nonprofit, such as staffing and administrative costs. Because they don’t have specific outcomes in mind, they are usually unconditional.
• Capacity-building grants aim to grow nonprofits into more sustainable and effective organizations. They might be used to pay for infrastructure upgrades or staff professional development.

Scholarship grants

A scholarship grant is given to an individual, with the intention of funding their education.

They come with tight conditions based on academic achievement.

Emergency grants

Nonprofits sometimes have to apply for emergency grants to access funds to cover short-term funding gaps.

This can be caused by unexpected circumstances, such as a natural disaster or economic crisis.

Using emergency grants can help organizations stay afloat in difficult times and usually come from the government or nonprofit foundations.

Understanding accounting for grants

To effectively manage grants, you need to understand a few key principles of nonprofit grant accounting:

How to report and track nonprofit grants

Reporting nonprofit grants starts with recognition of them in your accounts.

Grants should be recognized in profit or loss systematically over the periods that the related costs or expenses occur.

When the grants are related to assets, you can set up the grant as deferred income or deduct the grant from the carrying amount of the asset.

When you receive a capital grant, you should record this as deferred revenue.

This will then let you recognize this revenue over the depreciable life of any assets that you acquire with the grant funds.

When it comes to tracking nonprofit grants, it is much easier to use nonprofit accounting software.

This will let you automatically track every expense paid out of the grant. Which you can easily add to your accounts under the initial deferred revenue.

FASB vs IFRS grant accounting

Depending on the specific context of your nonprofit organization, you will have to follow slightly different guidelines for grant accounting.

The FASB (Financial Accounting Standards Board) which operates in the United States has a different set of expectations to the IFRS (International Financial Reporting Standards):

	IFRS	FASB
Definitions	Has a specific definition of government grants in IAS 20.	Does not have a specific definition; refer to IAS 20.
Recognition	Suggests recognizing grants when there is assurance that the recipient will comply with the conditions and that the grant will be received.	Nonprofits recognize grant contributions when the conditions have been met.
Measurement	Based on the value of the asset received or the grant amount.	Based on the value of the asset received or the grant amount.
Presentation	Gross or net presentation on the balance sheet.	Gross presentation recommended.
Grants related to depreciable assets	Recognized in profit or loss as the asset is depreciated.	Recognized in profit or loss as the asset is depreciated.
Grants related to non-depreciable assets	Recognized according to the conditions related to the grant.	Recognized according to the conditions related to the grant.
Income Grants	Recognized in profit or loss when receivable.	Recognized in profit or loss when receivable.

The IFRS and FASB offer different approaches to grant accounting.

However, these differences are largely related to the initial recognition of grants and accounting for their value over time is generally standardized.

Best grant accounting methods

• Accrual accounting: This method records revenues and expenses when they are earned or incurred, regardless of when cash is exchanged, providing a more accurate financial picture over time.
• Fund accounting: Commonly used by nonprofits and governments, this method segregates resources into separate funds according to their purpose, ensuring that specific grants are used as intended.
• Program-based accounting: This approach tracks financial activity by programs or projects, allowing organizations to manage and report on the performance of each program separately, often aligning with specific grant requirements.
• Grant-specific accounting: This method involves tracking and reporting all financial transactions related to a specific grant, ensuring compliance with the grant’s terms and providing detailed accountability for how funds are used.

Challenges of grant accounting for nonprofits

As you’ve probably noticed, there are some unique nonprofit accounting practices and expectations you’ll need to get to grips with.

Here are some of the key challenges you may face:

Complicated regulations

Nonprofits have to work within a complex and dense set of regulations.

On the one hand, there are guidelines that come from the grantor: funds will come with rules shaping how and when the money can be spent.

It’s important that you know these rules inside out.

On the other hand, you’ll need to follow general government regulations for nonprofits, such as the Generally Accepted Accounting Principles (GAAP) nonprofit rules as well as tax exemption laws.

These regulations increase if you’re taking government grants, some of which come with their own regulations.

Resource limitations

Nonprofits often face tight budgets and limited funding for administrative and financial staff, with each expense needing to be justified to external funders.

This can make managing the complexities of grant accounting challenging.

However, the adoption of nonprofit accounting software has helped alleviate some of these resource constraints by automating many grant management processes

Reporting constraints

Financial compliance in grant accountancy tends to have a specific set of constraints. These include following different reporting expectations for different grantors and having to operate within stringent timelines.

It’s common for different funders to have wildly different expectations about grant reporting.

Meaning that you may have to fill out different forms and track different aspects of expenditure for each grant that you receive.

You should also consider the financial literacy of funders when you present the data, especially with private funders.

There can be difficulties when it comes to proving impact as well.

Rather than being able to point to a quantitative set of data on a balance sheet, you might have to track qualitative factors when reporting back to funders.

This is made even more challenging by the time constraints that many nonprofits operate under.

The grant cycle–where organizations apply for grants and then implement them–shapes the entire operation of the nonprofit. It’s vital that you get reports produced in time for the next iteration of the grant cycle.

Grant guidelines updates

Most grants for nonprofits are conditional, meaning that you’ll have to stay on top of the guidelines for each grant.

These can change between grant cycles, as funders are likely to respond to their efficacy in the previous grant cycle.

Following these guidelines is imperative if you want to have a sustainable funding agreement for your nonprofit.

Cost allocation problems

Although grant guidelines often want reports to show exactly where and when the money has been spent, it can be difficult to accurately allocate spending with this level of specificity.

After all, projects can be complex, requiring multiple sources of funding that are not ring-fenced when used in practice.

Even with these challenges, your organization must take responsibility for meticulously tracking how each grant is used.

Establishing a transparent revenue stream is crucial for accurately allocating expenses and maintaining financial integrity.

Nonprofit grant accounting tips

Understanding the above challenges is an important step as you boost your grant accountancy skills.

Follow these fundamentals to ensure that grant accountancy is effective in your nonprofit:

Establish clear policies

Routines, procedures, and policies are the backbone of any efficient organization.

Once you’re aware of the accounting practices to follow as well as the specific guidelines and reporting regulations to use for each grant, you can create clear policies that everyone in your organization can follow.

These policies should be communicated clearly, demonstrating their purpose and importance.

To ensure clarity, they should also be linked to specific processes, such as expense tracking.

You want everyone to know why and how they should report expenses so that tracking grant expenses is easier for everyone involved.

Keep detailed and accurate records

Once you’ve got these policies and procedures in place, you need an organized and systemic approach to recording financial transactions.

This means keeping up-to-date records of invoices and receipts, that can create a clear trail of grant expenditures.

Ensure communication with grantors is consistent, simple, and regular

While you’ll have to follow the reporting requirements in each grant’s conditions, it’s good practice to regularly stay in touch with grantors.

Be fully transparent about how their grant is being used.

However, you should also remember that they often won’t be financial experts, so remember to simplify your communication when building this relationship.

Make the most of accounting software

Over the last decade or so, accounting software has significantly simplified financial management across all sectors. Nonprofits are no exception.

Specialist nonprofit accounting software is able to automatically track expenditures and measure these expenses against the grant conditions.

Accounting software can also be used to create financial statements and reports, automate recordkeeping, and assist your budgeting.

This can be invaluable as you get to grips with the many challenges of nonprofit grant accountancy.

How nonprofit grant accounting software simplifies grant accounting management

Grant accountancy can present a set of complex and unique challenges.

That’s why we recommend using grant accounting software to simplify this process for nonprofits.

Not only will this streamline the core accountancy operations, but choosing a specific grant accounting software means that it will be tailored to deal with the challenges of nonprofit accountancy.

Offering comprehensive grant accounting software, Sage can help you automate grant tracking and billing, effortlessly centralize grant documents and records to provide your organization with full visibility, ensuring compliance and successful mission delivery.

Grant accounting FAQs

How do grants work for nonprofits?

Grants are financial donations that a nonprofit receives, usually with conditions about how the funds are spent, which the nonprofit uses to achieve its goals and objectives.

How do you record a grant in accounting?

Grant funds are usually recorded as revenue in your accounts, which you can use to track how the money is spent.

Where does a grant go on the balance sheet?

On the balance sheet, grants are usually included as deferred income and are then shown on the profit and loss statement.

What are the IFRS grant accounting standards?

The IFRS standard for grant accounting is called IAS 20, including specific guidelines about how grants should be accounted for by nonprofit organizations.

What is revenue recognition for a nonprofit organization?

Nonprofit revenue recognition refers to the accounting principles and practices used by nonprofits to record and report on a range of different revenue streams.

This includes revenue from donations, membership dues, program fees, grants, and other sources.