Accounting for grants can quickly become chaotic if not properly administered. Nonprofit Auditors know grant funding has to be properly categorized and recorded as grant revenue, grant receivable or deferred revenue. Each expenditure must be matched to the appropriate grant. Discussion of each revenue category and each type of expenditure as well as the various types of grants is beyond the scope of this article.
Most grants stipulate how the expenditure of funds is to be reported to the grantor. The reports issued to the grantor should be supported by the general ledger. Matching fund requirements must be identified and cannot be used twice: to qualify for the matching fund requirement for two separate grants. If the grantor chooses to audit the nonprofit and cannot identify how the funds were spent, the grantor will usually require the funds to be repaid. Likewise, if the funds are determined to be used for expenditures not allowed by the grant document, the grantor will usually require the funds to be repaid. A process to identify the allowable cost of the grant should be implemented based on each grant received. The process should be managed by each department head and monitored by management and the governance board of the nonprofit. The process should provide for each expense to be matched and charged against the appropriate grant. Grants are often awarded based on the budget presented by the nonprofit when applying for the grant. The expenditures charged against the grant should lineup with the budget presented. The process should also include reporting on the program service. Some grants are based on the number of consumers served or the hours of service for a consumer. These grant revenues may not match the expense of providing the service. To satisfy the nonprofit auditors, the documentation should support the program service to satisfy the grant reporting requirements.
Many nonprofit organizations cannot afford fund accounting software. Some nonprofit organizations will keep records outside of the accounting system utilizing excel spreadsheets or specialized software for tracking grants. The majority of the small nonprofit organizations I audit in North Carolina utilize QuickBooks software. The biggest criticism for the use of QuickBooks is probably an unwieldy chart of accounts. Whatever system is adopted, the chart of accounts should have three segments for each account. The segments are to identify the program, identify the grant and identify the revenue or expense account. Each category of expense will have only one account number. For example, payroll tax expense will always be payroll tax expense. If the chart of account number assigned to payroll tax expense is 7040 the account may show up as 07-35-7040, or 02-07-7040 where the first two digits identify a program and the second two are grant specific, the third number identifies payroll tax expense.
It is important to establish and monitor the grant process from start to finish. The nonprofit organization could not only lose their grant funding but also their ability to secure future grants as well as face having to refund grant money already received.
Contact us, nonprofit auditors, to disucss your audit and review needs.