Grant Accounting: How to Track Grant Funds, Spending, and Reporting
Fund accounting answers one question: may I recognize this? Grant accounting answers four harder ones: may I spend it, on what, documented how, and reported when.
Those are separate systems with separate rules, and a cost can pass one and fail the other. A payment can be a perfectly valid release of a donor restriction and still be unallowable under the federal cost principles.
Grant Accounting and Fund Accounting Are Not the Same Thing
This post covers the second column. For the first, including the conditional versus restricted distinction that causes most revenue recognition errors, see our guide to fund accounting for nonprofits.
One thing to clear up before you go further, because searching this topic turns up at least three sets of rules that are not yours. Governmental accounting under GASB applies to government entities, not to you. The international standard on government grants is not US GAAP. And ASU 2025-10, the FASB standard on government grants issued in December 2025, creates Topic 832 for all entities except not-for-profit entities and employee benefit plans, because Topic 958 already covers government transfers that meet the definition of a contribution. If your board has been told to prepare for it, you can reassure them that it does not apply.
Not sure your grant tracking would survive an audit?
Setting It Up: What Your System Has to Capture
2 CFR 200.302 sets out what a federal recipient's financial management system must do, and paragraph (b)(1) is the backbone of everything that follows. You must be able to identify every federal award received and expended, including:
- The Assistance Listings title and number, not just the number.
- The Federal Award Identification Number.
- The year the award was issued.
- The federal agency, and the pass-through entity where the money reached you through one.
Capture those five at setup and the schedule of federal awards largely builds itself. Skip them and somebody reconstructs them in August from award letters, which is exactly how organizations end up with a late single audit.
The same section requires records that identify the amount, source and expenditure of federal funds, all supported by source documentation, and a comparison of expenditures with budget amounts for each federal award. That last one is not a nice-to-have report; it is a required feature of the system.
And two written policies that auditors ask for by name: written procedures for cash management under 200.305, and written procedures for determining the allowability of costs. Most organizations have neither until the first audit asks.
How you build it is up to you. The regulation prescribes no mechanism, so a two-dimensional structure works well in practice: the natural account for what was bought, and a tracking category, class or project for which grant it belongs to. That is professional practice rather than rule. What the auditor cares about is whether the data can be produced and tied back to source documents.
One relief worth knowing: where a funder requires accrual-basis reporting, 200.302(b)(2) provides that you must not be required to establish an accrual accounting system. A cash-basis organization can convert for reporting purposes without rebuilding its books.
Documenting Payroll, Where Most Findings Come From
Personnel is usually the largest charge to a grant and it is one of the areas auditors cite most often. It is also the area where published guidance is most often out of date, in two separate ways.
First, the citation. The standards for documenting personnel expenses are at 2 CFR 200.430(g). They used to be at paragraph (i), and paragraph (i) now covers institutions of higher education instead. A great deal of training material, including material published this year, still cites (i). If your policy document cites (i), update it.
Second, and more important: formal time and effort reports are not required. The rule is principles-based. Charges must "be based on records that accurately reflect the work performed", and those records must:
- Be supported by a system of internal control providing reasonable assurance that the charges are accurate, allowable and properly allocated.
- Be incorporated into the official records of the organization.
- Reasonably reflect the total activity for which the employee is compensated, covering federally assisted and all other activities.
- Support the distribution of the employee's salary among specific activities or cost objectives.
Note what is not there. No prescribed form, no mandated signature frequency, no required timesheet. In fact the regulation expressly permits records that "reflect categories of activities expressed as a percentage distribution of total activities".
Personnel activity reports with prescribed certifications do appear in the regulation, but as a remedy: where records do not meet the standards, the agency may require them. They are what happens when you get this wrong, not the baseline.
Now the part that actually catches people. The regulation says budget estimates "alone do not qualify" as support. The operative word is alone. You may charge payroll on budgeted percentages during the year, provided three things are true: the estimates produce reasonable approximations, significant changes are promptly recorded, and your internal controls include periodic after-the-fact reviews of those interim charges.
Charging at budgeted percentages all year with no true-up is the finding. Charging at budgeted percentages with a documented quarterly review is compliant. The difference between the two is a calendar reminder and a one-page memo.
When Can You Charge a Cost?
2 CFR 200.403 lists the factors. A cost must be necessary and reasonable, conform to any limitations in the award, be treated consistently with how you treat the same cost on non-federal work, be determined in accordance with GAAP, not be used to meet cost sharing on any other federal program, and be adequately documented.
Then the timing rule, which is easy to get wrong:
Costs must be incurred during the approved budget period. Not the period of performance. 2 CFR 200.1 defines a period of performance as the interval between the award's start and end dates, which "may include one or more budget periods". On a three-year award with annual budget periods, a cost incurred in year two cannot simply be charged against unspent year-one budget. That is a carryover question for the funder, not a free transfer.
Worth noting where this rule is not: 2 CFR 200.309 is commonly cited for it, but that section is titled modifications to period of performance and contains no cost-charging language whatsoever. It describes how the end date changes. The timing rule is 200.403(h).
Two useful exceptions sit either side of the period:
That second row is money organizations routinely leave on the table, because they treat the end date as a wall for everything.
Cost Share, Program Income and Drawdowns
Cost sharing and matching
Under 2 CFR 200.306, all cash and third-party in-kind contributions counted as match must be verifiable in your records, not counted toward any other federal award, necessary and reasonable, allowable, and provided for in the approved budget where the agency requires it.
- Unrecovered indirect costs may be used as match, with the prior approval of the agency or pass-through entity. Organizations either do not know this lever exists and go scrambling for cash match, or they use it without getting the approval, which invalidates it.
- Volunteer services are valued at the rate for similar work, consistent with what you pay for comparable work, or by the local labor market where the skill is not in your own workforce. The popular national headline figure for the value of a volunteer hour has no standing here.
- Donated employee services from another organization are valued at that employee's regular rate of pay plus reasonable fringe benefits.
- Donated property must not exceed fair market value at the time of donation, and the fair market value of in-kind contributions must be documented.
Program income, where the default surprises people
2 CFR 200.307 is explicit: "The deduction method will be used if the Federal agency does not specify a method".
Deduction means program income reduces the total allowable costs of the award, so it reduces your federal draw. It does not add to your budget. The addition method, the one most nonprofits assume applies, generally requires prior approval, except as the default for higher education institutions and nonprofit research institutions. Earning fee income on a grant-funded program and assuming you keep it on top of the award is a common and expensive mistake.
Two useful details. After the period of performance there are generally no requirements governing the disposition of program income, unless the agency's regulations or the award terms say otherwise. And proceeds from selling equipment or supplies bought with grant funds are not program income; they follow the property disposition rules instead.
Drawdowns and interest
The governing principle in 2 CFR 200.305 is that payment methods must minimize the time elapsing between the transfer of funds and their disbursement. Advances are limited to the minimum amounts needed, and reimbursement is preferred where the conditions for advance payment cannot be met.
Advance payment is the default, not reimbursement. Under 200.305(b)(1) a recipient must be paid in advance, provided it maintains written procedures that minimize the time between receiving the funds and spending them, and financial management systems that meet this part's standards for fund control and accountability. Reimbursement is preferred when those conditions cannot be met, when the funder sets it as a specific condition, when you ask for it, or where the award is for construction. The practical error is drawing on a schedule rather than against actual, immediate cash need.
On interest: advances must be held in interest-bearing accounts unless an exception applies. The two that matter to most nonprofits are receiving less than $250,000 in federal funding per year, or holding an account that would not reasonably be expected to earn more than $500 a year. You may retain up to $500 per year of interest earned. Anything above that goes back annually to the Department of Health and Human Services Payment Management System, and that applies even if you are not paid through that system and your funder is a different agency entirely.
If You Pass Money Down
First the classification, because it decides everything else. 2 CFR 200.331 says plainly that you must use judgment, that "the substance of the relationship is more important than the form of the agreement", and that "no single factor or any combination of factors is necessarily determinative". A scoring checklist is a documentation aid, not an answer.
This classification moves the other organization's single audit exposure, not yours. Under 200.501(g), funds you pass down as a subaward count toward that organization's $1,000,000 of federal awards expended, the single audit threshold, while payments you make to a contractor for goods or services do not count toward the contractor's total. Your own total is the same either way, because under 200.502(a) both the disbursement of funds to subrecipients and your own expense transactions under the award are federal awards expended by you. What changes on your side is the monitoring work under 200.332 and the subrecipient totals on your schedule of federal awards. Our guide to nonprofit audit requirements covers the thresholds.
If it is a subaward, 2 CFR 200.332 puts real obligations on you as the pass-through entity: check the subrecipient is not suspended or debarred before awarding, include the required federal award identification data elements in the subaward document, state the indirect cost rate, require access to records, and set closeout terms.
Then evaluate each subrecipient's fraud risk and risk of noncompliance, and monitor accordingly. The regulation lists four mandatory monitoring activities, not three, and checklists commonly stop at the first three: review financial and performance reports; ensure corrective action on significant developments; issue a management decision for audit findings relating to the award; and resolve audit findings specifically related to the subaward. You must also verify the subrecipient is audited where required.
The Procurement Thresholds Nobody Updated
This one is worth checking in your own policy today.
2 CFR 200 does not contain the procurement dollar thresholds. The definitions in 200.1 define the micro-purchase threshold and the simplified acquisition threshold by cross-reference to the Federal Acquisition Regulation rather than by stating an amount. So when the FAR figures changed on October 1, 2025, they flowed straight through to grant-funded procurement without a word of the Uniform Guidance being amended.
Because these are FAR figures rather than Uniform Guidance figures, confirm them against the FAR at 48 CFR part 2, subpart 2.1 before relying on them, check your award terms for whether the higher figures apply to awards made before October 1, 2025, and expect them to move again. The point that does not change is the mechanism: if your written procurement policy hard-codes a number, it falls out of date the moment the FAR moves, and you may be applying a stricter rule than the regulation requires.
And an option many small nonprofits do not know they have. 2 CFR 200.320 permits a recipient at (a)(1)(iv) to self-certify a micro-purchase threshold of up to $50,000 on an annual basis. The certification needs a written justification, clear identification of the threshold, and supporting documentation for one of three grounds: qualifying as a low-risk auditee under 200.520 on your most recent audit, an annual internal risk assessment to identify and manage financial risks, or, for public institutions, a higher threshold consistent with state law. Above $50,000 needs approval from the cognizant agency for indirect costs. If you process a high volume of small purchases under the FAR baseline, it is worth checking whether you qualify.
Reporting, Retention and Closeout
2 CFR 200.328 limits federal financial reporting to OMB-approved government-wide data elements, which currently means the Federal Financial Report, SF-425. Reporting is at least annual and generally no more often than quarterly.
Note that subrecipients close out thirty days sooner than recipients. Under 200.344 a subrecipient's final reports are due to the pass-through entity no later than 90 calendar days after the end of the subaward's period of performance, against 120 days for the recipient. A pass-through entity that gives its subrecipients the full 120 days it has itself is out of step with the regulation and leaves no time to review their figures before its own final report is due. Financial obligations must be liquidated on the same timetable.
On retention, 2 CFR 200.334 runs the clock for three years from the date you submit the final financial report. Not from the end of the period of performance, not from fiscal year end, and not from the audit date. Those are four different dates and the gap between them can exceed a year. Equipment records run three years from final disposition, which can be much later than everything else.
Build the schedule of expenditures of federal awards through the year. 2 CFR 200.510(b) requires it to list programs by agency and Assistance Listing number, name the pass-through entity and its identifying number for any subawards, give totals by program and cluster, show the total provided to subrecipients from each program, and carry a note stating whether you elected the de minimis indirect cost rate of up to 15 percent. Those are the same data elements 200.302 says your system must capture at setup. Design the chart of accounts once and the schedule falls out of it.
Private Foundation and State Grants Are Different
None of the above governs a private foundation grant. Those are governed by the grant agreement, and the agreement is the authority: the reporting format, the budget line taxonomy, any indirect cost cap, the variance tolerance before you need written consent to move money between lines, and whether unspent funds must be returned. Read it and build the mapping once, because the funder's budget categories rarely match your chart of accounts.
There is one place where regulation does reach the grantee. Where a private foundation makes a grant to an organization that is not a public charity, the foundation owes expenditure responsibility under IRC section 4945(h), and that pushes obligations down to you through the written agreement: a commitment to repay any portion not used for the grant purposes, full annual reports on how the funds were spent, and records of receipts and expenditures made available to the grantor.
Two details there run against common belief. Where the grantee is itself a tax-exempt private foundation, the regulations provide that it need not segregate grant funds physically or account for them separately on its books unless the grantor requires it, so the widespread assumption that every restricted grant needs its own bank account is not a rule from either regime. Other grantees follow different record rules, so check the agreement. And the records of expenditure must be kept for four years after completion of the use of the grant funds, which is longer than the federal three. An organization applying a single three-year policy across all grants is under-retaining on these.
On state grants, check rather than assume: many states have adopted the Uniform Guidance by reference or built a close analog, so a state award can carry federal-style requirements with no federal money involved.
Bottom Line
- Capture five identifiers at setup: Assistance Listings title and number, award identification number, year, agency and pass-through entity. The schedule of federal awards is built from them.
- Cite 200.430(g) for payroll documentation, not (i), and know that percentage distributions are allowed and formal time and effort reports are not required.
- Budget estimates are fine with after-the-fact reviews and are a finding without them.
- The timing rule is approved budget period, in 200.403(h), and closeout costs run to the final report due date.
- Program income defaults to deduction, which reduces your draw rather than adding to your budget.
- Subaward or contractor changes your single audit exposure, so document the judgment.
- Retention runs three years from final report submission, and four years on expenditure responsibility foundation grants.
Orbit Accountants sets up and runs grant tracking as part of our nonprofit bookkeeping service: a chart of accounts built around the awards you actually hold, monthly budget to actual by funder budget line, the after-the-fact payroll reviews the regulation asks for, and the schedule of federal awards maintained through the year rather than reconstructed at the deadline. If the grant records are already behind, our catch-up bookkeeping team starts there.
Also read: Fund Accounting for Nonprofits: What It Is and How It Works
Frequently Asked Questions
What is grant accounting?
It is the practice of tracking what a grant is spent on, documenting that the spending was allowable, and reporting it to the funder on the funder's terms. For federal awards the rules come from the Uniform Guidance at 2 CFR part 200; for private foundation and state grants they come from the agreement itself. It sits alongside fund accounting rather than replacing it: fund accounting determines when grant revenue is recognized and in which net asset class, while grant accounting governs whether a given cost can be charged to a given award and how that is evidenced.
What is the difference between fund accounting and grant accounting?
Fund accounting is a financial reporting discipline under US GAAP, principally ASC 958, that classifies net assets by donor restriction and determines when contribution revenue is recognized. Grant accounting is a compliance discipline governed by the award agreement and, for federal money, by 2 CFR part 200, and it governs allowability, documentation, procurement, reporting and closeout. The two can disagree: a cost can be a valid release of a donor restriction and still be unallowable under the federal cost principles.
What records must a nonprofit keep for a federal grant?
Under 2 CFR 200.302 the financial management system must identify every federal award by Assistance Listings title and number, Federal Award Identification Number, year of issue, federal agency and pass-through entity. It must maintain records identifying the amount, source and expenditure of federal funds, all supported by source documentation, and must allow comparison of expenditures against the approved budget for each award. Two written policies are also expected: procedures for cash management and procedures for determining the allowability of costs.
Are time and effort reports required for federal grants?
No, not as a specific form. The standards at 2 CFR 200.430(g), which moved from paragraph (i) in the 2024 revision, are principles-based: charges to federal awards for salaries must be based on records that accurately reflect the work performed, supported by internal control, incorporated into official records, and reflecting the employee's total activity across federally assisted and all other work. Percentage distributions are expressly permitted. Personnel activity reports with prescribed certifications are a remedy the agency may impose where records fall short, not a baseline requirement.
Can I charge payroll to a grant based on budgeted percentages?
Yes, during the year, provided you true them up. The regulation says budget estimates alone do not qualify as support, and the operative word is alone. Interim charging on estimates is acceptable where the estimates produce reasonable approximations, significant changes are promptly recorded, and internal controls include periodic after-the-fact reviews of those interim charges. Charging at budgeted percentages with no review is one of the errors auditors cite most often.
When must costs be incurred to be charged to a grant?
During the approved budget period, under 2 CFR 200.403(h). That is not the same as the period of performance, which may contain several budget periods, so on a multi-year award a year two cost cannot simply be charged against unspent year one budget. Costs incurred before the start date may be allowable as pre-award costs but only with the written approval of the federal agency, and administrative closeout costs may be incurred up to the due date of the final report, which is 120 days after the period of performance ends.
What is program income and do we keep it?
Program income is gross income directly generated by a grant-supported activity. The default treatment under 2 CFR 200.307 is the deduction method, which reduces the total allowable costs of the award and therefore reduces your federal draw rather than adding to your budget. The addition method, where program income increases the total award, generally requires prior approval, except that it is the default for higher education institutions and nonprofit research institutions. Proceeds from selling equipment bought with grant funds are not program income and follow the property disposition rules instead.
How long do we keep grant records?
For federal awards, three years from the date you submit the final financial report, under 2 CFR 200.334, which is not the same as the end of the period of performance, fiscal year end or the audit date. Equipment records run three years from final disposition. For private foundation grants subject to expenditure responsibility, the regulations require records to be kept for at least four years after completion of the use of the grant funds, so a single three-year policy across all grants under-retains on those.
Can Orbit Accountants set up our grant tracking?
Yes. We design the chart of accounts around the awards you actually hold, capture the federal award identifiers at setup so the schedule of expenditures builds itself, run monthly budget to actual against each funder's own budget lines, document the after-the-fact payroll reviews the regulation expects, and prepare the reporting calendar through closeout. That sits within our nonprofit bookkeeping service on a fixed monthly fee.
Legal Disclaimer
This article is for general information only and is not accounting, audit, tax or legal advice. It reflects the Uniform Guidance at 2 CFR part 200, Treasury regulations and IRS guidance as of [publish date]. Procurement thresholds are set by the Federal Acquisition Regulation rather than by the Uniform Guidance and change periodically, so confirm current figures before relying on them. Private foundation and state grant requirements are governed by the agreement and by state law and vary considerably. The treatment of any particular cost depends on the terms of the award behind it. Please speak with a qualified professional about your own position. Reading this article does not create a client relationship with Orbit Accountants.
