To record a government grant in accounting, debit cash when the funds arrive and credit a deferred revenue liability, then reclassify that liability to grant income in the periods you meet the grant’s conditions and incur the expenses it was meant to cover. The full amount rarely hits your income statement on day one. Grants sit as a liability first because you have received money you have not yet earned, and the accounting framework that applies to your entity, the classification of the grant, and the conditions in the award all control when that liability becomes revenue.
The Basic Journal Entry
When the check clears or the federal payment system deposits funds, the entry is straightforward: debit Cash for the full amount received and credit Deferred Grant Revenue (some ledgers call this account Unearned Revenue). That credit is a liability, not income. It reflects a performance obligation you still owe.
As the project moves forward and you incur eligible expenses, move a proportional amount out of the liability and into revenue: debit Deferred Grant Revenue and credit Grant Income. Most organizations run this reclassification monthly or quarterly so the statements stay current. Every line touching the grant should be tagged with the Federal Award Identification Number (FAIN) from the award notice. Commingling grant dollars with general operating funds in a single untagged account is one of the quickest routes to a compliance finding.
Before the first entry, verify the initial deposit against your bank statement or the federal payment system so the cash figure is exact. Pull the Grant Award Notification and confirm the FAIN, the Assistance Listing number, the budget period, the approved cost categories, and the performance goals that define when the money is earned. Those goals are what tell you when to move dollars out of the liability account.
Which Accounting Framework Applies to You
Three different standards can govern grant accounting, and they are not interchangeable. Pick the wrong one and the entries will be wrong from the start.
IAS 20 is the International Accounting Standard for government grants, used by entities reporting under IFRS. It covers both asset-related and income-related grants and recognizes a grant when there is reasonable assurance the entity will comply with the conditions and the funds will be received.1IFRS Foundation. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
ASC 958-605 governs U.S. not-for-profit entities recognizing contributions, including government grants. It uses a barrier plus right of return test to decide whether a grant is conditional or unconditional. That distinction controls when the credit hits revenue.
ASC 832 now governs U.S. for-profit business entities. Until late 2025, U.S. GAAP had no specific standard for government grants to businesses, and most for-profits applied IAS 20 or ASC 958-605 by analogy. In December 2025, FASB issued ASU 2025-10, adding authoritative guidance to ASC 832 on the recognition, measurement, and presentation of government grants for business entities.2FASB. Accounting for Government Grants
ASC 606 does not apply. Government grants are not exchange transactions with a customer in the ASC 606 sense, and treating them that way misstates both timing and presentation. If you have been running grants through ASC 606, ASC 832 is the standard to move to.
When You Can Recognize the Revenue
The controlling question is not when the money arrived, but when you earned it. Recognition requires reasonable assurance you will meet the grant’s terms and reasonable assurance the funds will actually be received. A submitted application does not create an asset. A verbal promise from an agency official does not create an asset.
Most federal grants are conditional. Under ASC 958-605, a grant is conditional when it contains both a barrier to earning the funds and a right of return if the barrier is not met. Barriers include measurable performance requirements, specific benchmarks, or milestones tied to the timeline. Until the barrier is cleared, the funds stay in the liability account. Recording income before conditions are met can force a restatement and raise questions about the organization’s solvency.
Unconditional grants, lacking both a barrier and a right of return, are recognized immediately when the award becomes legally enforceable. These are uncommon at the federal level. Even grants that look simple usually carry enough conditions in the fine print to be treated as conditional.
For income-related grants, once conditions are being met, revenue is recognized in the same period as the expenses the grant is meant to cover. A grant funding six months of payroll is recognized over those six months as payroll is incurred, not when the cash lands.
Asset-Related Grants: Gross Method and Net Method
When a grant funds a long-lived asset such as equipment, a building, or infrastructure, revenue is recognized gradually over the asset’s useful life rather than all at once. Non-monetary grants, where an agency transfers land or equipment directly, fall in the same category and are recorded at fair market value.1IFRS Foundation. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
Two presentation methods are acceptable under IAS 20 and the new ASC 832 guidance. Under the gross method, you record the full asset cost in the fixed asset account and hold the grant as deferred income, releasing it to revenue in step with depreciation over the asset’s useful life. Under the net method, you credit the asset account directly by the grant amount, which lowers the recorded cost basis and produces lower depreciation expense in future years. Pick one, apply it consistently across all grants, and disclose the method in the footnotes.
Cost Sharing and In-Kind Match
Federal grants often require the recipient to contribute its own resources toward the project. Under 2 CFR 200.306, cost sharing funds, including cash and in-kind contributions from third parties, must be verifiable in your records, not counted as match on any other federal award, necessary and reasonable for the project, and allowable under the Uniform Guidance cost principles.3eCFR. 2 CFR 200.306 – Cost Sharing
In-kind contributions need to be valued correctly. Volunteer services are valued at the rate you would pay for similar work. Donated property is valued at the lesser of remaining book value or current fair market value, unless the federal agency approves using fair market value. Unrecovered indirect costs can count toward match with prior approval from the awarding agency. Track match in a dedicated account or subledger so it can be pulled cleanly during an audit.
On indirect costs generally: if your organization has no federally negotiated rate, you can elect a de minimis rate of up to 15 percent of modified total direct costs without supporting documentation.4eCFR. 2 CFR 200.414 – Indirect Costs Once you elect it, you must use it on all federal awards until you choose to negotiate a rate.
Where Grants Show Up on the Financial Statements
Balance Sheet
Unearned grant funds appear as a liability, either deferred income or unearned revenue. For multi-year grants, split the balance between current liabilities (the portion expected to be earned within 12 months) and non-current liabilities. If you used the net method for an asset-related grant, the asset’s carrying value will be lower than its market price, which reduces reported total assets and equity.
Income Statement
Grant income appears in the period that matches the expenses it was designed to offset.1IFRS Foundation. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance It is commonly presented under a heading like Other Income to keep it separate from primary sales or service revenue. Alternatively, if the grant directly offsets a specific expense, you can reduce that expense line rather than showing a separate income line. Both are acceptable, but the method must be disclosed, and mixing approaches across grants without explanation will draw auditor scrutiny.
Footnote Disclosures
Footnotes must explain the accounting method used (gross or net for asset grants, the recognition policy for income grants), the total amount of government assistance received during the period, any unfulfilled conditions that could trigger repayment, and the nature and extent of grants recognized. These are not optional.
Tax Treatment
For a for-profit entity, government grants are generally included in gross income for federal tax purposes. Under 26 U.S.C. § 61, gross income means all income from whatever source derived, and no blanket statutory exclusion exists for government grants to for-profits.5Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined A grant is taxable in the year it is recognized as income under your accounting method, so the GAAP timing of recognition also drives the timing of the tax. Congress has enacted targeted exclusions for specific programs (COVID-era Restaurant Revitalization Fund grants, for example), but these are the exception. Confirm a specific statutory exclusion exists before treating any grant as tax-free.
For a 501(c)(3), government grants reported as contributions on Form 990, Part VIII, Line 1e are generally not subject to unrelated business income tax. IRS instructions direct nonprofits to report grants from government sources as contributions, distinct from program service revenue earned by providing goods or services to a government agency.6IRS. 2025 Instructions for Form 990 Return of Organization If the government is paying you to perform a service for its benefit, that is program service revenue on Line 2, not a contribution on Line 1e. The books must match the substance of the arrangement.
Documentation and Audit Trail
The entries only hold up if the paperwork behind them does. Keep the award notice, all correspondence with the grant officer, amendments, and the approved indirect cost rate in an organized file. Tag every ledger entry with the FAIN. Track cost sharing separately. Keep a subledger of expenditures by federal program so a Schedule of Expenditures of Federal Awards can be produced without reconstruction.
A non-federal entity that expends $1,000,000 or more in federal awards in its fiscal year must undergo a Single Audit. The threshold increased from $750,000 under revisions to the Uniform Guidance that took effect for fiscal years beginning on or after October 1, 2024.7U.S. Department of Health and Human Services Office of Inspector General. Single Audits FAQs For a calendar-year organization, the $1,000,000 threshold first applies to the fiscal year ending December 31, 2025.
Retention runs three years from the date you submit the final financial report on the award.8eCFR. 2 CFR 200.334 – Record Retention Requirements If litigation, a claim, or an audit finding is pending when that window closes, hold the records until the matter is resolved. For property and equipment purchased with grant funds, the retention clock does not start until three years after the asset’s final disposition. Organizations that dispose of grant-funded equipment years after the grant ends are often caught off guard when they find they still need the original purchase records.
A note on pass-through awards: if funds reach you through a state agency or larger organization rather than directly from a federal agency, determine whether you are a subrecipient or a contractor before recording anything. The classification changes your compliance obligations and what has to appear on the SEFA.9eCFR. 2 CFR Part 200 – Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards
Set up the chart of accounts, the cost allocation methodology, and the filing system before the first dollar is spent. Getting the structure right at the beginning is what keeps the journal entries defensible at the end.