Managing restricted funds and grant advances with Banana Accounting

A restricted fund contains resources that must be used for a specified purpose under the relevant INPAS criteria. A fund is not necessarily a separate bank account, and it is not the same thing as a project or a donor. With Banana Accounting+, you can use segments to identify funds, cost centres to monitor projects and donor centres to track individual contributors, all within the same accounting entries.

This guide uses illustrative examples from the INPAS Banana templates. The amounts are in EUR, and opening balances are assumed to be zero.

First, distinguish a restriction from a delivery obligation

Two donations may both be earmarked for a purpose, but they do not necessarily have the same accounting treatment:

• Restricted donation without a delivery obligation: a donor gives money for a particular purpose, without imposing a qualifying delivery obligation. When the NPO controls the money or has a right to receive it, the donation is generally recognised as income, attributed to the appropriate restricted fund.
• Grant with a delivery obligation: a funding agreement requires the NPO to complete an identifiable, enforceable activity or deliverable. If the money is received before that obligation is fulfilled, the amount is initially recorded as a liability, not grant income. Revenue is recognised when, or as, the obligation is fulfilled.

A restriction on how money may be spent does not automatically create a delivery obligation. The terms of the agreement must be assessed before choosing the entry.

Receive a restricted donation of EUR 1,000 (Fund A)

Benjamin Foster gives EUR 1,000 for Project 1. There is a restriction on the use of the money but no delivery obligation.

Double-entry accounting

• Date: 2024-01-15
• Description: Fund A restricted donation without delivery obligations
• Debit account: Bank:Fund A
• Credit account: Grants restricted Project 1:Fund A
• Amount: 1000.00
• CC2: Project 1
• CC3: Benjamin Foster

Income & Expense accounting

• Date: 2024-01-15
• Description: Fund A restricted donation without delivery obligations
• Income: 1000.00
• Expenses: leave empty
• Account: Bank
• Category: Grants restricted Project 1:Fund A
• CC2: Project 1
• CC3: Benjamin Foster

Result: EUR 1,000 is received in the bank and recognised as income attributable to Fund A.

Pay EUR 300 for Project 1 (Fund A)

The NPO pays for materials or services used by Project 1.

Double-entry accounting

• Date: 2024-01-22
• Description: Fund A project expense paid by bank
• Debit account: Expenses Project 1:Fund A
• Credit account: Bank:Fund A
• Amount: 300.00
• CC2: -Project 1
• CC3: leave empty

Income & Expense accounting

• Date: 2024-01-22
• Description: Fund A project expense paid by bank
• Income: leave empty
• Expenses: 300.00
• Account: Bank
• Category: Expenses Project 1:Fund A
• CC2: -Project 1
• CC3: leave empty

Result: Fund A has EUR 1,000 of recognised income and EUR 300 of expenses, giving an EUR 700 surplus for these activities. The positive/negative CC2 signs in these examples are chosen so that the Project 1 analytical centre also shows EUR 700. Other sign conventions are possible if applied consistently.

If an existing sample file still uses CC2: Project 1 on this expense, change it to CC2: -Project 1 to obtain the analytical result illustrated here.

Receive an advance of EUR 800 with a delivery obligation (Fund B)

Olivia Reynolds provides EUR 800 in advance under an agreement requiring the NPO to carry out specified, enforceable training activities. None of the activities has yet been completed.

Double-entry accounting

• Date: 2024-02-05
• Description: Fund B advance subject to enforceable delivery obligation
• Debit account: Bank:Fund B
• Credit account: Grant oblig. liability:Fund B
• Amount: 800.00
• CC2: leave empty, if CC2 is used to calculate project income minus expenses
• CC3: Olivia Reynolds (optional, to track funding received)

Income & Expense accounting

• Date: 2024-02-05
• Description: Fund B advance subject to enforceable delivery obligation
• Income: 800.00
• Expenses: leave empty
• Account: Bank
• Category: Grant oblig. liability:Fund B
• CC2: leave empty, if CC2 is used for the project's operating result
• CC3: Olivia Reynolds (optional)

In the Income & Expense model, Grant oblig. liability is a balance-sheet account defined in the Accounts table, even though it is entered in the Category column of this particular transaction. The Income column describes a cash inflow; it does not make the EUR 800 a revenue item in the Income Statement.

Result: bank assets increase by EUR 800, and a liability of EUR 800 is recognised. The advance does not increase the fund's net assets or the NPO's reported income at this stage. An individual donor centre may still show the cash received, which is different from recognised income.

Recognise EUR 400 after fulfilling part of Fund B's obligation

Suppose the agreement allows the NPO to recognise half the grant after completing half of the required activities. The recognition must follow the agreed and supportable measure of progress.

Double-entry accounting

• Date: 2024-03-15
• Description: Fund B grant revenue - delivery obligation partly fulfilled
• Debit account: Grant oblig. liability:Fund B
• Credit account: Grants restricted Project 2:Fund B
• Amount: 400.00
• CC2: Project 2 (if income is recorded as positive in the project analysis)
• CC3: leave empty

Income & Expense accounting

This is a non-cash accrual adjustment, not a new bank receipt. The liability must be reduced and grant revenue recognised using the relevant balance-sheet account and income category. This can require an adjustment involving Grant oblig. liability and Grants restricted Project 2, with fund-specific attribution and subsequent reconciliation. Test the entry and the related segment report in a copy of the Income & Expense file: attributing the same segment to both sides can duplicate the amount in the segment card. Do not book another EUR 400 receipt into Bank.

Result: Fund B has EUR 400 of recognised grant income and EUR 400 of grant liability still outstanding, assuming no further transactions. No cash has moved when the liability is released.

How to interpret the example totals

Before Example 4, the combined results of Examples 1-3 are:

• Bank: EUR 1,500 (EUR 1,000 received - EUR 300 paid + EUR 800 received).
• Outstanding delivery obligation liability: EUR 800.
• Recognised income: EUR 1,000.
• Expenses: EUR 300.
• Total net assets generated by these entries: EUR 700, attributable to Fund A.

After Example 4, the bank is still EUR 1,500. The liability falls to EUR 400, and recognised income increases by EUR 400. Subject to the agreement and other adjustments, the net assets arising from these transactions are EUR 700 for Fund A plus EUR 400 for Fund B.

Fund transfers, opening balances and reporting

• No fictitious bank payments: moving an amount from unrestricted to restricted net assets is not automatically a movement of cash. Do not record a bank payment just to create a fund balance.
• Transfers must be permitted: INPAS allows transfers between funds only where legally permitted. Describe and reconcile them in the fund movement disclosures.
• General Fund: all NPOs have a general fund. A dedicated :GEN segment is optional as a Banana setup choice, provided unassigned movements can still be identified and reconciled correctly.
• Opening balances: opening balances assigned to individual segments may require dedicated segment opening entries or the appropriate carry-forward procedure in Banana.
• Fund reconciliation: for each relevant fund, explain its purpose and reconcile the opening balance, recognised income, expenses, other changes, permitted transfers and closing balance. Do not treat a segment card's total as the net assets of that fund.

INPAS reporting reminder

Fund accounting is covered by INPAS, while revenue from grants and donations with or without delivery obligations is covered by INPAS. Banana provides detailed ledger and reporting tools to prepare this information, but the NPO remains responsible for assessing its grant agreements, allocating transactions correctly, preparing the required statements and completing the explanatory notes.