For many nonprofits, grants are a lifeline—fueling programs, projects, and operations. But receiving the funds is only half the story. Proper recognition and allocation are essential to maintain compliance, ensure transparency, and preserve eligibility for future funding.

Here’s a practical guide to help your organization get it right.

1. Recognizing Grant Funds

The way you recognize grant revenue depends on the type of grant:

• Conditional Grants: Recognize revenue only as you meet the grantor’s requirements (e.g., hitting project milestones).
• Unconditional Grants: Recognize revenue as soon as the funds are committed, provided you meet eligibility criteria.
• Reimbursable Grants: Recognize revenue when you’ve met conditions—usually after incurring costs and submitting for reimbursement.

Accounting Methods:

• Accrual Accounting (required under GAAP): Recognizes revenue when earned and expenses when incurred, not when cash moves.
• Fund Accounting: Essential for nonprofits, this tracks restricted versus unrestricted funds to ensure donor intent is honored.

Every grant dollar must be carefully assigned to eligible expenses.

• Direct Costs: Costs tied to a specific project (e.g., program staff salaries, equipment, or materials).
• Indirect Costs: Shared expenses (e.g., rent, utilities, admin salaries). These must be allocated consistently and fairly across projects.

Best Practices:

• Develop a clear allocation plan before spending.
• Segregate funds and maintain detailed records to avoid co-mingling.
• Provide consistent financial reports comparing spending to the plan.
• Conduct regular compliance checks and audits of indirect cost allocations.
  
  

When funds simply “pass through” your nonprofit:

• If you’re only administering payments (e.g., government vouchers), you may only recognize the administrative portion as revenue.
• In some cases, pass-through funds are treated as a liability until disbursed, rather than as revenue.
• Proper documentation is critical—track both inflows and outflows clearly.

• Compliance: Avoid penalties and protect your eligibility for future grants.
• Transparency: Build trust with funders by showing exactly how dollars are used.
• Financial Planning: Spot underfunded or overspending areas early.
• Sustainability: Strong grant management supports long-term financial health.
  
  

Key Takeaway

Grants bring opportunity, but also responsibility. By recognizing and allocating funds properly, your nonprofit strengthens compliance, builds funder trust, and maximizes every dollar’s impact.

For complex grants—especially government-funded or asset-related—consult with a CPA experienced in nonprofit accounting. The right guidance can help you stay compliant while making the most of your funding. If you have questions about grants, leave a comment below or feel free to contact me directly. I’m happy to help!