Skip to content

BIG NEWS! In order to better serve the QBOchat community, Twitter Chats will be replaced with podcasts starting on November 1st.

Managing Restricted Grants in QuickBooks Online

The Basics of Managing 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. If it is 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 manage restricted contributions in their chart of accounts

Don’t do this! You should 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

In short, 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 manage 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.

How should you manage restricted grants in QuickBooks Online?

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

When you want 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! 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…

  1. Save the chart of accounts for your natural categories.
  2. Keep classes to track function
  3. 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!”

Want to learn more about managing nonprofits in QuickBooks Online, connect with Megan through her website.

Share This Article!

Posted in

Megan Genest Tarnow

Megan founded the Mobius Group in 2000 with a vision of providing rock-solid financials to small nonprofit organizations. She comes from a long line of small business people, and began working in her family’s hearing aid dealership at the age of 10. With a BA in Theatre from Gustavus Adolphus College with a focus on Directing, she’s a pro at keeping an eye on both the details and the big picture, and she knows how to translate Accounting into Plain English.

9 Comments

  1. naser on June 14, 2019 at 12:26 pm

    Thank you, you just saved me from using the classes for a non profit.

    • Megan Genest Tarnow on July 1, 2019 at 12:48 pm

      And you just made my day!

  2. Laura on June 17, 2019 at 11:09 am

    What would you recommend if classes have been used for almost 20 years already to track grants? That would be a great follow-up article!

    • Megan on June 18, 2019 at 8:28 am

      Thanks for your comment, Laura.

      It can be hard to transition initially, especially if you’ve been using classes for this for a long time. Sometimes people start a whole new data file, especially if they are also transitioning from desktop to QBO.

      One option is to start with new grants, and close out the old ones using the existing method. It can be awkward until all the old grants are complete.

      Another option is to shift at the end of a fiscal year. You’d need to make entries at year end to move open balances from one process to the other.

      It’s a great idea for a follow up article!

      • Laura on June 19, 2019 at 1:40 pm

        Thanks so much for the reply. We will definitely consider!

  3. Anthony Nguyen on June 18, 2019 at 9:10 pm

    Can we run budget vs. actual report of a project? Can we split one bill to different projects in one entry? Thanks

    • Megan Genest Tarnow on June 24, 2019 at 1:11 pm

      Hi Anthony! You absolutely can. When you enter your budget, choose to subdivide by Customer. (You’ll need to set up multiple budgets. Put the full amount in the first month of the grant period.) And yes, you can have a separate project on multiple lines of a bill.

  4. Angela Puckett on October 4, 2019 at 4:58 pm

    How would you differentiate between donor restricted and board designated within the same project? I’m in planning stages to convert the church to QBOnline effective 1/1/20, and I really don’t want to use Classes the way everyone else recommends. The present COA is a mile long – separate line items for everything. They also have a PreSchool that is part of the church, but revenue/expenses are tracked separately – would you also set that up as a Project instead of their own COA lines? Can you input starting balances for endowments and TRNA when setting up Project, or is that done when setting up Customer? I’m trying to figure out how to simplify, but still give them the detailed information they’re used to. Thank you for any insight you can provide.

    • Megan Genest Tarnow on October 8, 2019 at 4:45 pm

      Angela! I just sent you an email. Classes are GREAT for function or “business line,” so it would make sense to set the preschool up as a class. Many houses of worship also use them to track their different funds. The chart of accounts wants to be pretty simple:natural categories that strangers would understand. I’ve been using Location to track net asset restrictions. Normally I have two: Without and With Donor Restrictions. If you have a lot of board-designated funds, you might want that to be a sub-location of Without Donor Restrictions. Projects right now are really tied to a single “customer” or income source, so they don’t work for what you might consider organizational projects. It’s really helpful to sit down with people and figure out who needs what information, and how often they actually need it, so you can capture it all in the simplest way. Here’s another post I wrote about thinking through your chart of accounts: https://www.neoncrm.com/nonprofit-finance-primer-accounting/

Leave a Comment





This site uses Akismet to reduce spam. Learn how your comment data is processed.

Cart Item Removed. Undo
  • No products in the cart.