How to Record Restricted vs. Unrestricted Grants in QuickBooks?
Recording restricted and unrestricted grants in QuickBooks is a crucial process for nonprofit organizations to maintain compliance, transparency, and financial integrity. By using class tracking, location tracking, and creating sub-accounts, you can accurately track these funds in both QuickBooks Online and Desktop.
Tracking restricted and unrestricted grants in QuickBooks is essential for nonprofits to manage finances in compliance with donor requirements and maintain transparency. Whether you're using QuickBooks Online (QBO) or QuickBooks Desktop, the process involves accurately recording and categorizing grants based on donor restrictions, ensuring that each type of fund is properly allocated for its intended purpose. In this guide, we'll walk you through the steps for recording restricted and unrestricted grants in both QuickBooks Online and QuickBooks Desktop, highlighting key differences and best practices for each platform.
Understanding Restricted vs. Unrestricted Grants
Before diving into the technical aspects of tracking grants in QuickBooks, it's important to understand the difference between restricted and unrestricted grants:
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Restricted Grants: These are funds that donors have designated for a specific purpose or project. Nonprofits are required to use the funds strictly according to the donor's stipulations. There are typically two types of restrictions:
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Temporarily Restricted: Funds that are restricted for a particular use until a certain condition is met (e.g., time-based, project completion).
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Permanently Restricted: Funds that must be held in perpetuity (e.g., endowments where only the interest can be used).
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Unrestricted Grants: These funds can be used for any purpose that aligns with the nonprofit’s mission. Nonprofits have the freedom to allocate unrestricted funds where they are most needed.
Recording Restricted vs. Unrestricted Grants in QuickBooks Online (QBO)
QuickBooks Online (QBO) provides several methods to track and manage grants, including using class tracking, location tracking, and projects. Here’s how to manage and record restricted and unrestricted grants in QuickBooks Online:
1. Turn on Class and Location Tracking
To differentiate restricted and unrestricted funds, you need to activate class and location tracking in QBO. Class tracking allows you to categorize transactions based on the type of fund (restricted vs. unrestricted), while location tracking helps you track where the funds are used or allocated.
Steps to Enable Class Tracking:
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Go to Settings ⚙️ and select Account and Settings.
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Click on the Advanced tab.
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In the Categories section, click Edit ✎.
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Toggle Track classes to On.
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(Optional) Enable the setting to warn you if a transaction is not assigned a class.
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Select whether you want to assign a class to the entire transaction or to each line item.
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Save the settings.
Steps to Enable Location Tracking:
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Go to Settings ⚙️ and select Account and Settings.
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Click on the Advanced tab.
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In the Categories section, click Edit ✎.
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Toggle Track locations to On.
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Save the settings.
2. Set Up Classes for Restricted and Unrestricted Grants
After enabling class tracking, you can create specific classes for restricted and unrestricted grants. Here's how to set up these classes:
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Go to Settings ⚙️ and click All Lists.
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Select Classes.
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Click New and enter the name for your class, such as “Restricted Funds” or “Unrestricted Funds.”
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For restricted funds, you can create subclasses for individual grants (e.g., “Grant A - Restricted”).
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Save the class.
3. Create Sub-Accounts for Grant Tracking
In addition to class tracking, you can create sub-accounts under your Chart of Accounts to track specific grants. Sub-accounts allow you to separate different funding sources without cluttering your main accounts.
Steps to Set Up Sub-Accounts:
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Go to Settings ⚙️ and select Chart of Accounts.
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Click New and choose Income as the account type for grant revenue.
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Name the account (e.g., “Restricted Grant Revenue”).
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Check the box that says “Is a sub-account” and select the parent account (e.g., Grants Income).
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Save the account.
4. Record a Grant Deposit (Restricted and Unrestricted)
When you receive a grant, you need to record it correctly in QuickBooks Online to track the restricted vs. unrestricted funds.
Steps to Record a Deposit:
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Click the + New button and select Bank Deposit.
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Choose the bank account where the funds are being deposited.
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Enter the deposit date and choose the appropriate customer (donor) from the drop-down menu.
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In the Account field, select the income account (e.g., “Restricted Grant Revenue” or “Unrestricted Grant Revenue”).
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In the Class field, assign the appropriate class (Restricted or Unrestricted).
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For restricted funds, ensure you’ve set the correct Location if using location tracking.
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Attach a copy of the deposit slip for record-keeping.
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Click Save and Close.
5. Running Reports by Class and Location
Once you’ve entered your restricted and unrestricted transactions, you can run reports in QBO to see how the funds are being used.
Steps to Run a Profit and Loss Report by Class:
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Go to the Reports tab.
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Search for Profit and Loss by Class.
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Customize the report to show only the specific class (Restricted or Unrestricted) you want to view.
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Click Run Report.
You can also run reports based on location tracking to monitor how restricted and unrestricted funds are used across different projects or programs.
Recording Restricted vs. Unrestricted Grants in QuickBooks Desktop
While QuickBooks Desktop doesn't have the same interface as QBO, it offers similar functionalities for tracking restricted and unrestricted grants.
1. Turn on Class Tracking in QuickBooks Desktop
In QuickBooks Desktop, class tracking is a feature that allows you to categorize your restricted and unrestricted funds.
Steps to Enable Class Tracking:
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Go to Edit > Preferences.
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Click on Accounting and then the Company Preferences tab.
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Check the box labeled Use class tracking for transactions.
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Click OK to save the settings.
2. Create Classes for Restricted and Unrestricted Funds
After enabling class tracking, you can create classes for restricted and unrestricted funds in QuickBooks Desktop:
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Go to Lists > Class List.
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Click Class at the bottom of the list and select New.
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Enter the name for the class (e.g., “Restricted Funds”).
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Save the class.
3. Record Grant Deposits in QuickBooks Desktop
When you receive a grant, record the deposit and categorize it using the appropriate class.
Steps to Record a Deposit:
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Go to Banking > Make Deposits.
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Select the account you want to deposit the funds into.
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Enter the customer (donor) and the amount.
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Choose the correct income account (e.g., “Restricted Grant Income”).
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Assign the appropriate class for restricted or unrestricted funds.
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Click Save & Close.
4. Create Sub-Accounts for Grant Tracking
To better manage different grants, create sub-accounts in the Chart of Accounts in QuickBooks Desktop:
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Go to Lists > Chart of Accounts.
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Click Account > New.
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Select Income as the account type.
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Name the account and check the Sub-account box.
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Choose a parent account (e.g., Grant Revenue).
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Save the account.
5. Running Reports by Class in QuickBooks Desktop
To view restricted and unrestricted funds, you can generate reports based on the classes you’ve set up:
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Go to Reports > Company & Financial > Profit & Loss by Class.
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Customize the report to filter by restricted or unrestricted funds.
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Click OK to generate the report.
Best Practices for Tracking Restricted and Unrestricted Grants
Whether you're using QuickBooks Online or Desktop, there are several best practices you should follow to ensure accurate grant tracking:
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Regular Reconciliation: Make sure you regularly reconcile bank deposits and grant transactions to maintain accurate financial records with QuickBooks.
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Detailed Documentation: Keep detailed records of donor agreements, restrictions, and grant documentation for compliance and transparency.
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Consult an Accountant: For more complex grant tracking scenarios, consult a nonprofit accountant to ensure proper fund allocation and reporting.
Conclusion
Recording restricted and unrestricted grants in QuickBooks is a crucial process for nonprofit organizations to maintain compliance, transparency, and financial integrity. By using class tracking, location tracking, and creating sub-accounts, you can accurately track these funds in both QuickBooks Online and Desktop. Following the steps and best practices outlined in this guide will help ensure that your nonprofit is equipped to handle grant tracking efficiently, keeping your financial reporting in line with donor requirements and nonprofit accounting standards.