How to Use Fund Accounting to Track Your Grants

Stay tuned as we continue our exploration of grant accounting to empower your nonprofit’s financial success. Proper grant cost allocation is critical for nonprofit organizations to maintain financial health, meet compliance standards, and build trust with donors and grantors. Allocating costs accurately ensures that funds are used as intended and helps nonprofits create transparent reports that demonstrate accountability. However, mistakes in grant allocations can lead to compliance violations, loss of funding, and a damaged reputation. An unconditional grant is a form of financial assistance provided to nonprofit organizations without the strict conditions and requirements often seen in conditional grants. Essentially, these grants entrust organizations with the discretion to determine how best to deploy the resources within the broader framework of their mission.

Report: Success Rates for Different Types of Grants

It also helps identify areas where your organization can improve its financial efficiency. The audit process strains resources, taking staff time away from regular duties and often revealing areas needing improvement. Many experts now say focusing too much on low overhead can hurt your mission because you underinvest necessary tools and talent. While managing individual gifts might seem easy, they often require sophisticated tracking systems. These systems handle recurring donations, matching gifts, and varying restriction levels.

Benefits for Nonprofits

The grant is recognized as income over the period necessary to match to the related costs, for which the grant is intended. Non-profit organizations must navigate the nuances of multi-year grants with precision, ensuring compliance with allocation terms and the impact these grants https://nyweekly.com/business/accounting-services-for-nonprofits-benefits-and-how-to-choose-the-right-provider/ have on their financial stability. Grant revenue should be recognized when non-profits overcome donor-imposed barriers and any uncertainty over the entitlement to the funds is resolved. For multi-year grants, revenue may be recognized over the term of the grant as barriers are surpassed and value is commensurate with costs incurred.

Best Practices for Grant Cost Allocations

• Managing finances through a proper nonprofit accounting system means dealing with different types of funds.
• Organization’s accounting systems must provide clear tracking and reporting features to manage these requirements.
• It’s designed to ensure that non-profit organisations use donations and grants precisely as directed by donors, foundations, or government agencies.
• The Statement of Activities tracks how you use it throughout the year—maybe $80,000 for mentor training, $15,000 for program staff, and $5,000 for required reporting.
• Once you’ve got these policies and procedures in place, you need an organized and systemic approach to recording financial transactions.

Every accounting services for nonprofit organizations donation must be accurately documented, and this entails more than recording the basic transaction details. It also involves documenting the donor’s restrictions, designations, or special handling requirements. For example, New York and California have detailed reporting requirements, while other states might be more relaxed. Small nonprofits might qualify for simpler forms (990-EZ or 990-N), but the basic requirements remain unchanged. Finding the right balance is key to maintaining donor trust and organizational sustainability. The August and November 2024 Nonprofit Connection newsletters included articles about best practices for segregation of duties related to the cash receipts, cash disbursements, payroll, and…

Fund restrictions

• There are approximately 1.56 million nonprofits registered in the United States according to the Internal Revenue Service.
• Restricted funds refer to grant money that must be used for a particular project, program, or purpose.
• Understanding the statement of cash flows is essential for assessing the financial health and sustainability of any nonprofit organization.
• By implementing sound accounting practices, nonprofits can enhance transparency, compliance, and financial efficiency.
• Double-check your proposal for spelling and grammatical errors, and make sure it meets all formatting and submission requirements.
• For example, a federal grant may specify that the funds be used for community outreach, education, or infrastructure development.

This format also delineates funds with restrictions from funds without donor restrictions. By focusing on net assets without restrictions, organizations are given the most accurate and relevant picture of the net assets available for use. For analysis, planning, and decision-making, it is important for an organization to understand what part of their net asset position is without restriction. Net Assets reflect the equity of your nonprofit and are broken into restricted and unrestricted funds. These accounts show the balance of funds after liabilities are subtracted from assets, and they indicate whether contributions must be used for specific purposes. When you use non-profit accounting software to track your funds, you demonstrate that your organisation is a responsible steward of the financial resources entrusted to you.

Other special funds

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. As you’ve probably noticed, there are some unique nonprofit accounting practices and expectations you’ll need to get to grips with. This will then let you recognize this revenue over the depreciable life of any assets that you acquire with the grant funds. If you’re a nonprofit in education, healthcare or infrastructure, it’s highly likely that you’ll be primarily working with government grants. Equipping your finance team with a strong understanding of grant accounting is key.