Recording Cash Receipts from Grants – Cash/Accrual Basis

Nonprofit organizations may solicit and receive grants from a variety of sources, including federal, state and local governments, corporations and foundations.

The term cash receipts includes currency, checks, etc. received by mail or in person. Good cash-receipt handling contributes to good cash-flow management and the task is most manageable when receipts are posted promptly in the accounting system. Over time, you will begin to see patterns in your organization so that accurate predictions of cash-flow needs can occur.

Keeping detailed records of grant receipts will assist you in the separation of business income from other income, which is crucial when answering questions from the IRS and is beneficial during audits. Further, to facilitate a smooth audit process it is recommended that the original supporting documentation related to grants and their receipts should be maintained at a central office rather than at many different locations within the organization.

The most common grants are described below:

1. A pass-through grant is received by a nonprofit organization and is transferred to another entity. When funds are received the organization should debit cash and credit a liability account; revenue should never be recognized on these grants unless there is an arrangement where the organization receives a fee for assisting in the collection of the funds.

2. A cost-reimbursement grant reimburses a nonprofit entity for a specified cost incurred by the nonprofit in the performance of a specific program activity.

3. A program or operating grant provides funding to the nonprofit organization for the operation of an entire organization or one of its programs.

4. A challenge grant requires a nonprofit organization to raise gifts from other contributors in order to receive the challenge grant proceeds (i.e. grantor will contribute $5,000 if the nonprofit organization raises the initial $5,000 to support operations of program X).

Under the cash basis of reporting the organization should debit cash and credit the related revenue account upon receipt (i.e. the revenue account that relates to the programs/services that the grant funding is being received for).

If the organization is reporting under the accrual basis of accounting:

1. Reimbursement grants are recorded as a debit to cash and a credit to deferred liability.  As the appropriate expenses have been incurred, the deferred liability is debited and revenue is credited.

2. Challenge grants are initially recorded as a deferred liability. When the conditions of the challenge have been met, revenue is recognized (deferred liability account is debited and the revenue account is credited).

Having problems converting your receipts to the accrual basis of accounting? Give us a call.