Accounting for grants can be a tricky and we recommend seeking advice from your accountant or auditor.
If the grant is for expenditure that you would normally record in the profit and loss account, then the grant income should also be reported in your profit and loss account too. In this case just record this as a Receipt transaction directly into your bank account and record expenditures in the normal way.
We suggest creating a new “Grant Fund” Fund to record the grant income and expenditure and allow you to manage its running balance (this is especially useful if you hold the monies in your main bank account(s) )
If the grant is not to be used immediately then you will need to hold this on your balance sheet but not show it as income yet. The way to do this is record the grant receipt into your bank account and show it on you balance sheet as deferred income. You will do this using an Account Transfer. When you are ready to release the grant and [part] use the funds, you will record the income as a Receipt transaction from your Deferred Grant A/c - this will record the income on your P&L and reduce the deferred grant balance. Record the grant expenditure as a Payment from the Bank Account.
As above, we also suggest creating a new Grant Fund to record the grant income and expenditure.
These are the steps to follow:
1) 1st Jan - Record Grant income into your Bank Account(s) as an Account Transfer
- Create new liability Account = “Deferred Grant A/c” > Type = “Creditor”
- Create a new Fund = "Grant Fund"
Create an Account Transfer:
- Date: 1st Jan
- Amount: £10000
- From: “Deferred Grant A/c”
- To: “Bank Account”
- Check “Show Funds” box and select “Grant Fund” for both entries
This adds the grant monies into your bank account. The Account Transfer a) does not create an income line in your P&L, and b) The Deferred Grant liability offsets the Account balance on the Balance Sheet.
Financial Reporting as at 31st Jan,
- Balance Sheet = £0 ( Bank A/c £10000 - Deferred Grant -£10000)
- Profit and Loss = £0 Surplus (£0 income - £0 expenditure)
2) 1st July - When grant funds are ready to be used, create Income and Expenditure transactions to record these in your P&L. We're assuming £5000 is initially released, and £3000 spent, in this example.
Part release the deferred grant funds by creating a Receipt transaction:
- Date: 1st July
- Amount: £5000
- Account = Deferred Grant A/c
- Fund = “Grant Fund”
This creates an income in your P&L and reduces the Deferred Grant liability balance by £5000
Create Payment transaction(s) to record when the actual grant funds are used/spent - note this is from your “Bank Account" as this is where the funds are held:
- Date: 21st July
- Amount: £3000
- Account = “Bank Account”
- Fund = “Grant Fund”
- >>>> This creates an expenditure in your P&L and reduces the Bank Account balance by £5000
Financial Reporting as at 30th July,
- Balance Sheet = £2000 (Bank A/c £7000 - Deferred Grant -£5000)
- Profit and Loss = £2000 Surplus (£5000 income - £3000 expenditure)