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:
Classes are ideal for tracking the information needed for the Statement of Functional Expense: Program, Management and General, and Fundraising.
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.
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.
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…
Save the chart of accounts for your natural categories.
Keep classes to track function
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.
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.
33 Comments
naseron June 14, 2019 at 12:26 pm
Thank you, you just saved me from using the classes for a non profit.
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.
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.
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.
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/
This is excellent! I’d tried many different ways to handle and didn’t like them. The best news is, I was already doing it booking to customer and projects. THANK YOU!
Hi Kathy! I’m glad it looks like it will work for you. If you’re interested, we’d love to have you in the QuickBooks for Nonprofits facebook group: https://www.facebook.com/groups/QB4NPs/
Thank you – this article is great. It’s helped me decide to move forward in using the Projects feature for grants. One of a few issues I have run into is when we get multiple grants from different people for the same project. What would you do in that case? Just continue to keep each grant separate, regardless?
Hi Erin,
It can depend on the level of detail you’ll need to report back to your funders. If they are going to need specifics of how “their” dollars were spent, I would still use Projects. If they only need to know that you did the thing, I would create a sub-customer, but not track expenses back to it on a transactional level. Each month, review the program activity and determine (possibly with input from your program and development staff) how much to release from each grant.
I think I understand how to use the Project feature for restricted grants, except I can’t figure out how to specify the grant period in the project. I need to be able to track restricted grants across fiscal years.
By default, the period in the Projects Center is set to “all dates,” meaning from the time of first activity to “today”. You can adjust this as needed in the reports filters. If you need to enter a budget for it, the recommendation is to enter the full grant budget in the first month of the grant period, and then report out from there.
The Project solution is working great for us so far! Thanks for the suggestion. The only issue I’ve run into at this point is for a piece of equipment purchased with grant funds which was allocated to the Equipment account, a fixed asset account rather than an expense account. I set the Customer/Project for that check written to pay for the equipment to the sub-customer associated with the project, but that amount isn’t showing up as being an “expense” for the grant. The payee for the check needs to be different than the Customer/Project, but I even tried changing the payee temporarily and that didn’t work either. Is there a way you could suggest to fix this? Is there something I’m missing on how to do this?
Equipment which will be recorded as a fixed asset is a typical item purchased with grant funds, so this is something we’ll run into frequently.
Thanks!
Budgeting for fixed assets and assigning them to grants is a common problem. The way I’ve addressed it is to create an expense group way down in my chart of accounts for Capital Purchases. It includes Computers & Equipment, Leasehold Improvements – essentially a mirror of your fixed asset accounts, and another called Transfer to Fixed Assets.
I code the initial cost to the expense account, and assign the Project so that it shows up on the Project report. In the same transaction, I enter a negative line to Transfer to Fixed Asset (no Project) and a positive line to the actual Fixed Asset account (no Project). Transaction total is accurate, everything ends up where it needs to, AND I have the information I need on the grant report.
A second but similar question – also tried using Projects to manage funds that are allocated to a Liabilities account where we are serving as the fiscal sponsor for another organization and tracking their income/expenses. Those items aren’t showing up in the Project I created for it either.
Thanks!
I don’t recommend treating fiscal sponsorship funds as a liability. Read “Fiscal Sponsorship: 6 Ways to Do It Right” for more information, but the two most common methods are Type 1 (treat it like a program of your organization) and Type 2 (pre-approved regrant, with your org acting as the “funder,” with all the oversight you’d expect of that role.)
In Type 1, you treat the sponsored income as restricted funds and the sponsoree as a Project. In Type 2, the income is again restricted but the expense is a single line, something like “Awards & Grants to Others.”
For folks using Type 1, I’ve seen them create a sub-location of With Donor Restrictions, so they can pull both a P&L and a Balance Sheet for the project.
Megan- I agree with your recommendation to not treat fiscal sponsorship funds as a liability. Unfortunately, we already have fiscal sponsorship funds coded to the liability account which will be distributed over the course of multiple years. We have already reported these funds as a liability on our 990 for the last two years.
Do you have any advice on how to transition out of that set up in terms of adjustments to make in QBO, as well as how to address this change in our next 990?
I was already using Projects to track restricted donations for one of my non-profit clients. The problem I have ran into is that a few of their restricted funds are more generic and can have contributions from more than one donor. For instance, a rent relief fund to help pay the rent of individuals struggling to get by. Many individuals or organizations can and do donate with this specific restriction. However, since the project feature uses sub-donor to track income/expenses – I would actually have to use my project sub-donor/customer as the “customer” instead of the person who actually gave the funds. I tried making my individual donors sub-donors of the project sub-donor, but it doesn’t allow you to make a sub-donor of the project, just of a normal donor. As such, it seems if I use projects I have one of two options: I can track my restricted donations as projects and lose the ability to easily identify who gave the funds, without digging through details later (which becomes a nightmare when trying to determine end of year donor letters) or I can easily identify who gave the donation, but use one of the less ideal methods (which I agree with you – I don’t like the using GL line items or class as the primary way). Do you have any thoughts or solutions to creating manageable projects in which multiple people can donate to the restricted fund?
I’ve got some of these too. They get complex, and beyond the original article.
First we create an internal customer for the pool of funds. If you have several of these, you could create a primary customer with additional sub-customers. If it is really specific, I might also create a service item for it. We receive the donation from the individual who gave it, coded to the restricted program. At month end, I’d review the P&L by class and/or the sales by service reports to see what was given to the project pool, and do an entry debiting an other income account (Into)/Out of Restricted Net Assets and crediting YTD change in Restricted Net Assets, with the name of the Pooled fund in the customer field on the credit line. As funds are spent, they are released from the pooled fund.
Actually, just realized that if you make the Pool a project, and use the name in the debit line, you can then track it as described in the article.
Hi Radie! If the funder is going to need you to report back specifically how you spent their money, projects work great. The other key piece that is reflected on the financials is the receipt and release of restricted funds. You need to show how much came in with restrictions and how much has been released (P&L), as well as the balance of restricted net assets and whether those are cash or receivable (balance sheet). I use Locations to capture that info.
I use journal entries to allocate payroll to classes every month (after syncing from ADP). Some of that payroll needs to assigned to a grant. I don’t see a way to do via JEs. Can you advise?
Hey, I’ve been reading up on using projects and locations to track restricted funds and all. This may be a silly question, but how do I keep expenses using restricted funds from mucking up the budget vs actuals report? Say we spent $300 more than budgeted from the operating budget on a program, and that difference was paid for from a restricted fund. We didn’t overspend, but looking at the B vs A report, it looks that way.
Hi Megan. I have the same issue about recording restricted grant. I know I am in the QBO chat but I am using desktop version. We have a donor who specifically wanted the donation to go to education purposes. QB Desktop doesn’t seem to have “Projects”.
Your advice makes so much sense on paper, but I sense I’m doing something wrong in QBO. The only type of revenue that seems to be available whether I try using customer or project is “sales.” But that does not conform to my chart of accounts (contributions/grants/membership dues). I pull up a bank deposit and try to assign it to the customer or project. Then when I try to look at the customer or project, only the expenses show up. The revenue is always $0 unless I create an invoice or sales receipt. But then the revenue would be incorrectly described as Sales on the Statement of Activities. Any idea what I’m missing?
Nevermind. My error was not recording the project simultaneously in both the “received from” field and the “project” field on my deposits. It creates an error in QBO, but unfortunately there was no error message. If at first you don’t succeed, try and try again…
Thank you, you just saved me from using the classes for a non profit.
And you just made my day!
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!
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!
Thanks so much for the reply. We will definitely consider!
Can we run budget vs. actual report of a project? Can we split one bill to different projects in one entry? Thanks
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.
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.
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/
This is excellent! I’d tried many different ways to handle and didn’t like them. The best news is, I was already doing it booking to customer and projects. THANK YOU!
Hi Kathy! I’m glad it looks like it will work for you. If you’re interested, we’d love to have you in the QuickBooks for Nonprofits facebook group: https://www.facebook.com/groups/QB4NPs/
Thank you – this article is great. It’s helped me decide to move forward in using the Projects feature for grants. One of a few issues I have run into is when we get multiple grants from different people for the same project. What would you do in that case? Just continue to keep each grant separate, regardless?
Hi Erin,
It can depend on the level of detail you’ll need to report back to your funders. If they are going to need specifics of how “their” dollars were spent, I would still use Projects. If they only need to know that you did the thing, I would create a sub-customer, but not track expenses back to it on a transactional level. Each month, review the program activity and determine (possibly with input from your program and development staff) how much to release from each grant.
Thanks for this useful information. You provided a clearer image and better on how to manage donor’s funding through QBO.
Thanks Leon. I’m glad you found it helpful.
I think I understand how to use the Project feature for restricted grants, except I can’t figure out how to specify the grant period in the project. I need to be able to track restricted grants across fiscal years.
By default, the period in the Projects Center is set to “all dates,” meaning from the time of first activity to “today”. You can adjust this as needed in the reports filters. If you need to enter a budget for it, the recommendation is to enter the full grant budget in the first month of the grant period, and then report out from there.
The Project solution is working great for us so far! Thanks for the suggestion. The only issue I’ve run into at this point is for a piece of equipment purchased with grant funds which was allocated to the Equipment account, a fixed asset account rather than an expense account. I set the Customer/Project for that check written to pay for the equipment to the sub-customer associated with the project, but that amount isn’t showing up as being an “expense” for the grant. The payee for the check needs to be different than the Customer/Project, but I even tried changing the payee temporarily and that didn’t work either. Is there a way you could suggest to fix this? Is there something I’m missing on how to do this?
Equipment which will be recorded as a fixed asset is a typical item purchased with grant funds, so this is something we’ll run into frequently.
Thanks!
Budgeting for fixed assets and assigning them to grants is a common problem. The way I’ve addressed it is to create an expense group way down in my chart of accounts for Capital Purchases. It includes Computers & Equipment, Leasehold Improvements – essentially a mirror of your fixed asset accounts, and another called Transfer to Fixed Assets.
I code the initial cost to the expense account, and assign the Project so that it shows up on the Project report. In the same transaction, I enter a negative line to Transfer to Fixed Asset (no Project) and a positive line to the actual Fixed Asset account (no Project). Transaction total is accurate, everything ends up where it needs to, AND I have the information I need on the grant report.
Thanks so much for your responses to both of my questions!
A second but similar question – also tried using Projects to manage funds that are allocated to a Liabilities account where we are serving as the fiscal sponsor for another organization and tracking their income/expenses. Those items aren’t showing up in the Project I created for it either.
Thanks!
I don’t recommend treating fiscal sponsorship funds as a liability. Read “Fiscal Sponsorship: 6 Ways to Do It Right” for more information, but the two most common methods are Type 1 (treat it like a program of your organization) and Type 2 (pre-approved regrant, with your org acting as the “funder,” with all the oversight you’d expect of that role.)
In Type 1, you treat the sponsored income as restricted funds and the sponsoree as a Project. In Type 2, the income is again restricted but the expense is a single line, something like “Awards & Grants to Others.”
For folks using Type 1, I’ve seen them create a sub-location of With Donor Restrictions, so they can pull both a P&L and a Balance Sheet for the project.
Megan- I agree with your recommendation to not treat fiscal sponsorship funds as a liability. Unfortunately, we already have fiscal sponsorship funds coded to the liability account which will be distributed over the course of multiple years. We have already reported these funds as a liability on our 990 for the last two years.
Do you have any advice on how to transition out of that set up in terms of adjustments to make in QBO, as well as how to address this change in our next 990?
Hi Amy,
I don’t do tax, so you may want to get specific guidance there. (do it. get specific guidance!)
An adjustment I’ve seen is just to recognize the balance in the liability account as Restricted income, and then continue with the new process.
Hi,
I was already using Projects to track restricted donations for one of my non-profit clients. The problem I have ran into is that a few of their restricted funds are more generic and can have contributions from more than one donor. For instance, a rent relief fund to help pay the rent of individuals struggling to get by. Many individuals or organizations can and do donate with this specific restriction. However, since the project feature uses sub-donor to track income/expenses – I would actually have to use my project sub-donor/customer as the “customer” instead of the person who actually gave the funds. I tried making my individual donors sub-donors of the project sub-donor, but it doesn’t allow you to make a sub-donor of the project, just of a normal donor. As such, it seems if I use projects I have one of two options: I can track my restricted donations as projects and lose the ability to easily identify who gave the funds, without digging through details later (which becomes a nightmare when trying to determine end of year donor letters) or I can easily identify who gave the donation, but use one of the less ideal methods (which I agree with you – I don’t like the using GL line items or class as the primary way). Do you have any thoughts or solutions to creating manageable projects in which multiple people can donate to the restricted fund?
Hi Lindsay,
I’ve got some of these too. They get complex, and beyond the original article.
First we create an internal customer for the pool of funds. If you have several of these, you could create a primary customer with additional sub-customers. If it is really specific, I might also create a service item for it. We receive the donation from the individual who gave it, coded to the restricted program. At month end, I’d review the P&L by class and/or the sales by service reports to see what was given to the project pool, and do an entry debiting an other income account (Into)/Out of Restricted Net Assets and crediting YTD change in Restricted Net Assets, with the name of the Pooled fund in the customer field on the credit line. As funds are spent, they are released from the pooled fund.
Actually, just realized that if you make the Pool a project, and use the name in the debit line, you can then track it as described in the article.
Hope this helps!
What would you recommend to a grant that is restricted only to salary? Can that be a project, too? How will that look in the Balance Sheet and P&L?
Hi Radie! If the funder is going to need you to report back specifically how you spent their money, projects work great. The other key piece that is reflected on the financials is the receipt and release of restricted funds. You need to show how much came in with restrictions and how much has been released (P&L), as well as the balance of restricted net assets and whether those are cash or receivable (balance sheet). I use Locations to capture that info.
I use journal entries to allocate payroll to classes every month (after syncing from ADP). Some of that payroll needs to assigned to a grant. I don’t see a way to do via JEs. Can you advise?
Hey, I’ve been reading up on using projects and locations to track restricted funds and all. This may be a silly question, but how do I keep expenses using restricted funds from mucking up the budget vs actuals report? Say we spent $300 more than budgeted from the operating budget on a program, and that difference was paid for from a restricted fund. We didn’t overspend, but looking at the B vs A report, it looks that way.
Hi Megan. I have the same issue about recording restricted grant. I know I am in the QBO chat but I am using desktop version. We have a donor who specifically wanted the donation to go to education purposes. QB Desktop doesn’t seem to have “Projects”.
Your advice makes so much sense on paper, but I sense I’m doing something wrong in QBO. The only type of revenue that seems to be available whether I try using customer or project is “sales.” But that does not conform to my chart of accounts (contributions/grants/membership dues). I pull up a bank deposit and try to assign it to the customer or project. Then when I try to look at the customer or project, only the expenses show up. The revenue is always $0 unless I create an invoice or sales receipt. But then the revenue would be incorrectly described as Sales on the Statement of Activities. Any idea what I’m missing?
Nevermind. My error was not recording the project simultaneously in both the “received from” field and the “project” field on my deposits. It creates an error in QBO, but unfortunately there was no error message. If at first you don’t succeed, try and try again…