Accounting for Donations and Grants in Nonprofits & For-Profit Hybrids

Thinking Ledger
Jun 12
3 min read

Updated: 3 days ago

Whether you’re a nonprofit, a B Corp, or a mission-driven for-profit startup receiving grants and donations, accounting for these funds correctly is critical. It affects how you report income, meet compliance obligations, and retain donor or grantor trust.

This article breaks down how to handle donations and grants from an accounting perspective—especially for hybrid models that blend mission with business.

Who Needs This?

● Nonprofits (501(c)(3), NGOs, foundations)

● Social enterprises and Public Benefit Corporations (PBCs)

● For-profits receiving grant funding (e.g., research startups, green tech, impact-oriented businesses)

First, What’s the Difference?

Type	Revenue Type	Tax Treatment	Key Accounting Standard
Donations	Contribution	Usually tax-exempt	FASB ASC 958 (nonprofits)
Grants	Contribution OR Exchange	Depends on terms	ASC 958 or ASC 606/730

How to Recognize and Record Donations

For Nonprofits:

Under ASC 958, donations are considered contributions and must be categorized as:

1. Unrestricted – Can be used for any purpose.

2. Temporarily Restricted – Limited to a time period or specific use.

3. Permanently Restricted – Funds that must remain in perpetuity (e.g., endowments).

Journal Entry Example – Unrestricted Donation:

Dr. Bank $10,000 Cr. Contribution Revenue $10,000

Journal Entry – Temporarily Restricted Donation (e.g., for scholarships):

Dr. Bank $15,000

Cr. Contributions – Temp Restricted $15,000

When restriction is fulfilled (e.g., used for scholarships):

Dr. Contributions – Temp Restricted $15,000 Cr. Contributions – Unrestricted $15,000

Accounting for Grants: Is It a Contribution or Exchange?

Step 1: Determine the nature of the grant

● If grantor receives nothing of value back → Contribution (ASC 958)

● If grantor receives goods/services/data → Exchange Transaction (ASC 606 or 730)

For For-Profit Hybrids:

Most grants to for-profits are exchange transactions and fall under ASC 606 (Revenue Recognition) or ASC 730 (R&D grants).

Example: NIH research grant to a biotech startup

● If the grant stipulates delivery of results/data → it’s exchange-based.

● Recognize revenue as performance obligations are met, not all at once.

Journal Entries for Exchange-Based Grants

Let’s say your business receives a $100,000 milestone-based grant:

● $40,000 upfront

● $30,000 after milestone 1

● $30,000 after milestone 2

When cash is received:

Dr. Bank $40,000

Cr. Deferred Grant Revenue $40,000

When milestone 1 is achieved:

Dr. Deferred Grant Revenue $30,000

Cr. Grant Revenue $30,000

Special Considerations for Hybrid Models

1. Track Funding Sources Separately

Use class or department tracking in your accounting system (e.g., QuickBooks, Xero, NetSuite) to track:

Donations
Grants
Earned revenue (sales, memberships)

This is critical for reporting to donors or grantors

2. Understand Restrictions & Reporting Requirements

Restricted donations and government grants usually require:

Proof of use
Periodic financial and impact reports
Return of funds if misused

Create separate projects or cost centers for each grant/donation to stay compliant.

3. Use Proper Recognition Timelines

For contributions: recognize revenue when received or promised
For grants: recognize revenue as services or deliverables are provided

Sample Chart of Accounts Additions

Contributions – Unrestricted
Contributions – Temporarily Restricted
Grant Revenue – Government
Grant Revenue – Foundation
Deferred Grant Revenue (Liability)
Fundraising Expense
Program Service Expense (by function)
Administrative Overhead

Key Takeaways

Donations = contribution revenue; use ASC 958
Grants = may be contribution or exchange; use ASC 958 or ASC 606/730
Hybrid and for-profit models must track restrictions and deliverables
Set up chart of accounts to segregate funding sources
Reporting, compliance, and timing of revenue recognition matter