Accounting for Restricted Grants

by Rebecca Burdick, studioD

A restricted grant is when an individual, business, government or a foundation donates money to a nonprofit for a specific purpose. Depending on the size of the grant, the grantor may require monthly or quarterly reports to ensure the money is managed and spent according to the grant agreement.

Grant Agreement

A grant agreement should accompany the grant funds so that it is very clear what the terms of the grant are. This is especially important when the grant is restricted, because there may be terms having to do with time restrictions in addition to restrictions on how the money is spent. Often, the grant agreement will also include requirements for reporting on either a monthly or quarterly basis.

Receiving the Money

Upon receiving the grant check, you will want to debit cash or the bank account that you deposit the check into and credit the income account associated with grant funds. Depending on your software, you would create a sales receipt to record the grantor information as well as the income account that will be credited. You will then make the deposit within the software to the bank account, thereby debiting cash.

Tracking the Money

Since this is a restricted grant, it is important to have a system in place to track the use of these funds. If you are using software such as Quickbooks or Peachtree, you will want to use classes or jobs respectively as a means of tracking. These two software systems allow you to run reports that detail not only the income account but also expense accounts associated with the specific grant. If you are using an accounting software that does not offer the option to track using classes or jobs, then it will be necessary to create a special account for both the income and the expense associated with the grant.


Some of the common reports that grantors will require are profit and loss by class or job, also known in the nonprofit accounting world as a statement of financial activities by class or job. This report will show the income and expenses for a given period just for that specific grant. Depending on the size and complexity of the grant, it may be advisable to create a budget that breaks down exactly how the grant should be spent. Most of the common accounting software programs have the capability to run a budget versus actual report for a given period. This report will compare actual income and expenses associated with the grant funds against the budget. Ideally, the organization should come fairly close to the target for the budget if the monies are being spent according to the terms set forth in the grant agreement.


Restricted grants are the least-ideal types of funds to receive, because you are forced to spend them a certain way, usually in a specific period of time. Most often these grants are intended to be spent on the program or mission of the organization and can't be allocated toward operational costs. Another concern is that if for some reason you do not spend these funds as intended or you do not have accurate reporting systems in place to show how the funds are performing, the grantor has every right to revoke the full amount.

About the Author

Rebecca Burdick began her freelance writing career in 2007 and currently writes for several online publications. She specializes in small business bookkeeping and financial management. Burdick studied accounting and economics at Boise State University and University of California at Riverside.

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