Grants are a common source of funding for many organizations, including nonprofits, governmental entities, educational institutions, and even for-profit businesses. Accounting for grants can be complex, as it often depends on the nature of the grant and the conditions attached to it. This tutorial will walk you through how to account for grants, with examples of full journal entries and their impact on financial statements.
1. Understanding the Nature of the Grant
Grants can be classified in different ways, but the two most common categories are unconditional grants and conditional grants.
- Unconditional grants: These grants are given without any specific conditions or requirements that must be fulfilled by the receiving entity. Once the grant is received, the funds can be used at the organization’s discretion.
- Conditional grants: These grants come with stipulations or conditions that must be met before the funds can be recognized as revenue. The recipient may need to fulfill certain obligations, such as performing a service, achieving a specific objective, or meeting reporting requirements.
The accounting treatment varies depending on the type of grant, so understanding the specific terms is crucial.
2. Accounting for Unconditional Grants
Let’s start with the simpler scenario of an unconditional grant. Unconditional grants are typically recognized as revenue when received because there are no performance conditions attached.
Example: Unconditional Grant
Assume a nonprofit organization, “Hope for Education,” receives an unconditional grant of $50,000 from a philanthropic foundation. The grant is unrestricted, meaning the organization can use it for any purpose.
Journal Entry Upon Receipt of the Grant:
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan 1, 2024 | Cash | $50,000 | |
| Grant Revenue | $50,000 |
In this example, “Cash” is debited because the organization has received money. “Grant Revenue” is credited because this represents the income recognized from the grant.
Financial Statement Impact
- Income Statement (Profit & Loss Statement):
- The $50,000 will be recognized as revenue, increasing the total income of the organization for the reporting period.
- Balance Sheet:
- The cash balance will increase by $50,000, showing a stronger financial position in terms of liquidity.
- Since this is revenue, it will also increase the organization’s net assets (equity).
Partial Balance Sheet for Hope for Education (after grant):
| Balance Sheet | Before Grant | Impact of Grant | After Grant | |
|---|---|---|---|---|
| Assets | ||||
| Cash | $20,000 | +$50,000 | $70,000 | |
| Total Assets | $20,000 | +$50,000 | $70,000 | |
| Equity | ||||
| Unrestricted Net Assets | $20,000 | +$50,000 | $70,000 | |
| Total Equity | $20,000 | +$50,000 | $70,000 |
In this case, the grant has improved both the financial position and the revenue of the organization.
3. Accounting for Conditional Grants
Conditional grants are more complex because the revenue cannot be recognized until the conditions are met. The funds may be received upfront, but they should not be recognized as income until the conditions specified by the grantor are satisfied.
Example: Conditional Grant
Let’s modify the previous example. Suppose “Hope for Education” now receives a conditional grant of $100,000, but the funds can only be recognized as revenue if the organization constructs a new library. Until the library is built, the grant is considered deferred income.
Journal Entry Upon Receipt of the Grant:
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan 1, 2024 | Cash | $100,000 | |
| Deferred Revenue (Liability) | $100,000 |
Here, the cash account is debited because the organization has received the funds. However, instead of crediting revenue, the organization credits “Deferred Revenue” (a liability account), reflecting the obligation to fulfill the grant’s conditions.
Journal Entry Upon Meeting the Condition (Building the Library):
Assume “Hope for Education” completes the library on June 1, 2024.
| Date | Account | Debit | Credit |
|---|---|---|---|
| June 1, 2024 | Deferred Revenue (Liability) | $100,000 | |
| Grant Revenue | $100,000 |
When the condition is met (i.e., the library is built), the deferred revenue is removed from the liability section of the balance sheet and recognized as grant revenue in the income statement.
Financial Statement Impact
- Income Statement:
- The $100,000 will be recognized as revenue on June 1, 2024, boosting the organization’s total income for the period.
- Balance Sheet:
- On January 1, 2024, cash will increase by $100,000, but the deferred revenue liability will also increase by the same amount, resulting in no change to net assets.
- After the condition is met, the deferred revenue liability will decrease, and the equity (unrestricted net assets) will increase, improving the organization’s financial standing.
Partial Balance Sheet for Hope for Education (Before and After Meeting the Condition):
| Balance Sheet | Before Grant | After Receiving Grant | After Meeting Condition | |
|---|---|---|---|---|
| Assets | ||||
| Cash | $20,000 | +$100,000 | $120,000 | |
| Total Assets | $20,000 | +$100,000 | $120,000 | |
| Liabilities | ||||
| Deferred Revenue | $0 | +$100,000 | $0 | |
| Total Liabilities | $0 | +$100,000 | $0 | |
| Equity | ||||
| Unrestricted Net Assets | $20,000 | $20,000 | +$100,000 | |
| Total Equity | $20,000 | $20,000 | $120,000 |
In this scenario, after receiving the conditional grant, cash increases, but so does the liability, so there is no net change to equity. After the conditions are fulfilled and the grant revenue is recognized, equity increases significantly.
4. Grants Related to Capital Assets
Some grants are given for the purpose of acquiring or constructing capital assets, such as buildings, equipment, or infrastructure. In such cases, the grant is tied to the asset and the revenue may be recognized either immediately or over the useful life of the asset (via depreciation).
Example: Grant for Capital Assets
Let’s assume that “Hope for Education” receives a $200,000 grant to build a new science laboratory. The grant stipulates that the funds are to be used exclusively for this purpose.
Journal Entry Upon Receipt of the Grant:
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan 1, 2024 | Cash | $200,000 | |
| Deferred Revenue (Liability) | $200,000 |
Journal Entry When the Laboratory is Built:
Assume the science laboratory is built for $200,000 by December 31, 2024.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31, 2024 | Building (Asset) | $200,000 | |
| Cash | $200,000 |
At the same time, the deferred revenue will be recognized as income:
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31, 2024 | Deferred Revenue (Liability) | $200,000 | |
| Grant Revenue | $200,000 |
Now, the organization has built the science laboratory and recognized the grant as revenue.
Depreciation of the Laboratory
Assume the useful life of the science laboratory is 20 years with no salvage value. The depreciation expense each year would be $200,000 / 20 = $10,000.
Journal Entry for Depreciation:
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31, 2025 | Depreciation Expense | $10,000 | |
| Accumulated Depreciation | $10,000 |
Financial Statement Impact
- Income Statement:
- The $200,000 will be recognized as revenue in 2024, increasing total income for that year.
- Depreciation expense of $10,000 will reduce net income annually for the next 20 years.
- Balance Sheet:
- The organization’s assets will increase by $200,000 due to the construction of the science laboratory.
- Over time, the accumulated depreciation will reduce the book value of the building.
Partial Balance Sheet for Hope for Education (After Building the Laboratory):
| Balance Sheet | Before Grant | After Building Lab | After First Depreciation | |
|---|---|---|---|---|
| Assets | ||||
| Cash | $120,000 | $120,000 | $120,000 | |
| Building | $0 | +$200,000 | $200,000 | |
| Accumulated Depreciation | $0 | $0 | -$10,000 | |
| Total Assets | $120,000 | $320,000 | $310,000 | |
| Liabilities | ||||
| Deferred Revenue | $0 | $0 | $0 | |
| Total Liabilities | $0 | $0 | $0 | |
| Equity | ||||
| Unrestricted Net Assets | $120,000 | $320,000 | $310,000 | |
| Total Equity | $120,000 | $320,000 | $310,000 |
After the laboratory is built, the organization’s assets and equity increase substantially. Over time, depreciation will reduce the book value of the laboratory.
5. Conclusion
Accounting for grants requires careful attention to the conditions and purpose of the grant.
- Unconditional grants are recognized as revenue when received.
- Conditional grants are recognized as revenue only when the conditions are met.
- Grants related to capital assets involve accounting for both the asset and potential depreciation over its useful life.
By following these guidelines and examples, you’ll be able to account for grants accurately and reflect them correctly on financial statements. The key is to always assess the conditions attached to the grant and ensure that revenue is recognized appropriately to reflect the financial reality of the organization.