Not all companies rely on sales from clients as their main source of revenue.
Institutions like small businesses, social enterprises, and R&D companies can be partially or even entirely funded by grants, rather than sales revenue.
These grants require a specific kind of financial treatment, known as grant accounting.
In this guide, we’ll explore the ins and outs of grant accounting, explaining what it is, the different types of grant accounting that are applied, and best practices for getting it right in your own organization.
What is grant accounting?
Grant accounting, also known as grant management accounting, is the process of tracking grant funds, managing financial activity, and ensuring nonprofit grant compliance.
Understanding grant accounting
Grant accounting is the practice of tracking, managing, and reporting all financial activity related to grants. These grants are often provided by government agencies or foundations that have a vested interest in developing business in a certain area (such as scientific research).
It involves recording and monitoring all transactions tied to a grant so that funds are used according to the agreement and regulations.
Grant accounting ensures that when funds are received from a grant, they are used in accordance with the grant agreement and any applicable regulations, providing a paper trail of how, when, and where funds are used.
In nonprofit financial management, grant accounting plays a critical role in maintaining transparency, demonstrating compliance, and securing continued funding.
Accurate tracking of the use of grant funds helps these companies allocate expenses correctly, avoid overspending or misuse of funds, and meet strict reporting requirements that impact their eligibility for future grants.
In the United States, grant accounting is governed by strict regulatory frameworks. Nonprofits receiving federal funds must follow Uniform Guidance (2 CFR Part 200). This outlines:
- Cost principles
- Audit requirements
- Administrative rules for grant-funded programs
In addition, state and private funders often have their own compliance standards, which makes robust grant accounting systems essential not only for compliance and risk mitigation but also for operational success.
Why is grant accounting important?
For companies that rely on external funding (nonprofits, for instance), accurate and compliant grant accounting is essential. It supports long-term sustainability and strengthens relationships and credibility with funds, auditors, and stakeholders.
Solid granting accounting is important to:
- Resource allocation: Grant accounting ensures that funds are used for their intended purpose, helping nonprofits allocate resources efficiently and align spending with program goals.
- Transparency and trust: Clear and traceable financial records help to reinforce the organization’s reputation for integrity and build trust with donors, boards, and even the general public.
- Regulatory compliance: Proper grant accounting helps nonprofits meet funder requirements and government regulations such as Uniform Guidance, reducing the risk of penalties, audit findings, or having to return funds.
- Maintaining eligibility for future funding: Many grants are conditional on meeting reporting and performance requirements. Strong grant accounting helps demonstrate impact, increasing the chances of renewal or future funding.
- Accuracy in financial reporting: A reliable system for tracking the use of grant funds ensures that a company’s financial statements accurately reflect its financial position, supporting audits, public disclosures, and board decisions.
Key components of grant accounting
Effective grant accounting requires structured processes that align with both funder expectations and internal financial controls. Key components include:
- Revenue recognition: Grant income must be recognized according to the funding agreement.
- Expense tracking and budgeting: All expenses must be tracked against the approved grant budget.
- Reporting requirements: Most grants require periodic financial and programmatic reports
- Fund segregation: It is often a requirement that grant funds be kept separate from other funds to support clear tracking and prevent misuse.
- Compliance monitoring: A critical part of grant accounting is to regularly review spending, timelines, and usage against grant terms to ensure compliance and avoid clawbacks.
- Reporting and record-keeping: Businesses receiving grants provide timely financial reports that reflect actual grant activity, support transparency, and maintain funder confidence. They must also maintain thorough documentation, such as invoices, receipts, timesheets, and correspondence to support audits and future funding reviews.
- Budget control: Comparing actual expenditures to the grant budget allows for proactive adjustments and prevents overspending or underutilization.
Different types of grants and their accounting implications
Not all grants are necessarily treated the same way from an accounting standpoint.
That’s because each type of grant comes with its own unique requirements that impact how nonprofits manage and report on funds received and spent.
Here’s a quick overview:
- Government grants: These typically have the strictest regulatory and reporting requirements, especially when it's a federal grant. Businesses must follow standards like Uniform Guidance (2 CFR Part 200).
- Private grants: These are grants funded by foundations or even individual donors. Private grants tend to be more flexible, though they often have associated reporting requirements or impact metrics to be met.
- Corporate grants: These grants are issued by businesses and are often part of CSR (corporate social responsibility) initiatives, so they may include branding or publicity obligations alongside financial reporting requirements.
- Project grants: These are grants that are restricted to specific initiatives or programs. Funds are regularly required to be tracked separately, and spending must align with the approved project scope and timeline.
- Operating grants: These grants can come from any of the above sources and are designed specifically to support organizational expenses. They tend to come with broad conditions, though they still require careful tracking.
- Scholarship grants: These grants are designated for education-related support. Usually restricted to tuition, books, or living expenses, and often require proof of student eligibility and use.
- Emergency grants: These grants are awarded in response to crises or urgent needs. They often have rapid distribution and reporting timelines, requiring more agile and adaptive accounting processes.
Whatever category a grant falls into, the funder provides that the grant stipulates whether it is a restricted or unrestricted grant.
In the case of a restricted grant, the funds can only be used for specific purposes as designed by the funder (such as education). Restricted grants require careful segregation and reporting.
Unrestricted grants, on the other hand, can be used at the nonprofit’s discretion and spent as they see fit, though the organization must still account for its usage of funds accurately and transparently.
Best practices for grant accounting management
Looking to improve how your organization manages and accounts for the grants it receives?
Here are five best practices to put in place right now to protect funding, streamline operations, and build trust with stakeholders.
1. Implement effective tracking systems
Track each grant separately within your accounting system using unique fund codes or segments.
This will help ensure that income and expenses tied to specific grants are clearly visible, helping program managers monitor spending against budget.
2. Conduct regular audits and reconciliations
Routine internal reviews (monthly, quarterly, or at key project milestones) are essential for verifying that spending aligns with business grant conditions and approved budgets.
This gives you an opportunity to uncover errors, catch compliance issues early, and ensure that financial records are audit-ready.
3. Utilize accounting software built for grant management
Modern accounting software with robust grant-specific accounting features can help reduce manual errors and streamline spending monitoring.
Look for tools that offer:
- Real-time budget tracking
- Automatic alerts for key deadlines
- The ability to generate funder-specific reports
4. Train staff on compliance and financial protocols
Grant compliance isn’t just a finance team responsibility. Program managers and operational staff must understand allowable expenses, reporting expectations, and documentation standards.
Engage your team in regular training to ensure that everyone is equipped to manage grant funds responsibly, avoiding missteps that could jeopardize future funding opportunities.
5. Maintain clear, centralized documentation
Thorough, accurate, and accessible documentation is critical for both internal controls and for external audits. Every single grant-related transaction, whether it's an invoice, payroll allocation, or subcontract agreement, should be documented and stored and a well-organized and accessible system.
Good recordkeeping helps demonstrate accountability and makes reporting far less stressful when deadlines approach.
Grants vs loans
Grants and loans are similar: one organization provides funds to another for a specific purpose.
But they aren’t the same thing. The key difference lies in the expectation for repayment.
Grants are funds given to an organization for a given purpose and do not need to be repaid. Loans, on the other hand, do need to be repaid.
Loans are typically repaid over time, often with interest, and are recorded as liabilities on the balance sheet. While grants are treated as income when conditions are met, loans are not recognized as revenue.
Resources for nonprofits in grant accounting
Interested in learning more about grant accounting?
Here are some in-depth, helpful resources to consider checking out:
- National Council of Nonprofits: Provides resources on federal and private grant compliance, indirect cost recovery, reporting, and capacity building.
- Nonprofit Accounting & Financial Statements: Overview for Board, Management, and Staff: An in-depth handbook on nonprofit accounting by Thomas R. Ittelson.
- 9to5 National Association case study: Learn how this nonprofit saves 20 hours a week on its $6.5M annual budget with BILL
BILL’s integrated and automated financial operations solution helps nonprofits streamline accounts payable, stay on top of accounts receivable, and simplify spend management and grant accounting.
Dive into BILL for nonprofits today.
Frequently asked questions
How do you record a grant in accounting?
Grants are recorded as revenue once the organization meets the conditions of the grant agreement. In the case of a conditional grant, income is typically deferred until those conditions are satisfied.
Expenses related to the grant must be tracked separately to ensure compliance and accurate financial reporting.
What is the difference between fund and grant accounting?
Fund accounting is the broader framework that nonprofits use to track financial activity across different funding sources.
Grant accounting is a subset of fund accounting. It focuses specifically on tracking, managing, and reporting on grant-related income and expenses.
What do grant accountants do?
A grant accountant is responsible for managing the financial aspects of grant funding.
The typical duties of a grant accountant include:
- Tracking grant income and expenses
- Ensuring compliance with grant terms
- Preparing financial reports
- Maintaining documentation
- Supporting audits or reviews from funders
