The Basics of Tracking Restricted Grants

It’s a common misconception that nonprofits are run entirely with other people’s money – meaning grants and donations.

While that is false, it is TRUE that the need to accurately account for restricted contributions is one of the key differences in working with nonprofits.

Properly set up and maintained, QuickBooks Online is an effective and affordable tool for nonprofit organizations, and even provides some options not available in the desktop version.

Some organizations may track restricted contributions in their chart of accounts.

Don’t do this!

Use the chart of accounts to track the “natural categories” of income and expense needed to run the organization and report to the IRS on the annual 990 filing.

What are “natural categories” of contributed income?

• Individual Donations

• Corporate & Foundation Grants

• Federated Fund Allocations

• Government Grants and Contracts

What are NOT “natural categories”?

• Awesome Foundation

• Langford gift

• Unrestricted Contributions

• Restricted Grants

Do the tax preparer a favor, and be a good steward of the organization’s resources: don’t use accounts that require translation or a calculator to flow to your 990!

Some organizations may try to use Classes to track restricted contributions.

I don’t recommend this method, for several reasons:

1. Classes are ideal for tracking the information needed for the Statement of Functional Expense: Program, Management and General, and Fundraising

2. Often restricted grants will cover expenses that cross function, which leaves you debating which class to put it to. Code it to the grant class? Code it to the program class? Eliminate the struggle whenever possible.

3. Even if there is a 1:1 relationship between the program and its funding source, the grant is not the program! Don’t let the tail wag the dog.

4. It’s not scalable.

I hope your organization is around for as long as it takes to fulfill your mission.I hope lots of funders fully support your Theory of Change and give you grant after grant after grant… Close your eyes for a moment and imagine what using Classes for all of those grants would look like in QuickBooks…

Don’t do that to your data file.

So what SHOULD you do??

An easy place to track restricted contributions is in the Customer list.

Every restricted contribution comes from somewhere: an individual, a foundation, or a government entity. (New guidance clarifies this. Audited financials now show income and net assets With Donor Restrictions.) That source is your customer.

Don’t get hung up on the terminology. A nonprofit might have donors, members, students, clients – consider anyone who gives you money to be a Customer.

Plan ahead! Be optimistic! Assume that a Customer giving you a restricted grant will probably give you another, and that you will want to be able to tell them apart!

Set each individual restricted grant up as a sub-customer.

• This allows you to see the income from each grant separately, and to track costs back to it using the Customer/Project field on Expense transactions.

  • In order to use this feature, you must first turn on “Track expenses and items by customer” on the Expenses tab of Account and Settings

In order to see the activity on the grant, and know the restricted balance, run a Profit & Loss by Customer report, filtered for that specific sub-customer, and set the date range for the correct time period.

QuickBooks Online gives us another option: Projects

I am really excited about the new Projects Center as a way to track restricted grants!

• In order to use this feature, you must first turn on “Use project financial tracking” on the Advanced Tab of Account and Settings

In many ways, Projects function just like sub-customers. You assign costs to them using the same Customer/Project field on expense transactions. The difference is the new, and constantly improving, Projects Center.

With the Projects Center, you get a dashboard view of all your restricted grants at once, from their inception to the present moment.

This is fantastic visibility into grants that cross fiscal years!

You can drill down into the specifics of the grant.

You can even drill down further to see what makes up the detail of “Materials & Supplies,” all from the Projects tab!

When the grant is finished, simply mark it Complete in the Projects Center. That removes it from the dashboard while maintaining all your information and allowing you to easily get back to it later.

In a Nutshell:

• Save the chart of accounts for your natural categories.

• Keep classes to track function

• Use sub-customers or Projects to track restricted grants!

The more you understand both the needs of nonprofits, and the features available in QuickBooks Online, the easier it is to create an elegant and scalable data file that can provide meaningful financial information, for as long as it takes to say, “Mission Accomplished!”

This post was originally written for the QBOChat blog and published on High Rock Accounting.