Understanding the Difference Between Contracts and Grants in Nonprofit Bookkeeping

For nonprofits, securing funding is essential to support their mission. But not all funding is the same. Two common types of funding are contracts and grants, and understanding the difference between them is crucial. They may sound similar and are often words used in lieu of each other, but they come with very different rules and responsibilities. In this blog, we’ll break down what sets contracts and grants apart and why this matters for your nonprofit’s bookkeeping.

Why It’s Important to Know the Difference:

You might think that funding is just funding, whether it’s called a contract or a grant. However, the distinction is important because it affects how you manage and report your finances. Understanding whether your funding is a contract or a grant will help you stay compliant with legal requirements and keep your books accurate.

Contracts: Agreements for Services

What Are Contracts?

Contracts are agreements where your nonprofit agrees to provide specific services or goods in exchange for payment. This payment is only made once the services or goods are delivered.

Key Points About Contracts:

1. Who Benefits? The organization or agency that gives you the contract is usually the one benefiting from the work you do. For example, if the government contracts your nonprofit to provide community services, the government (and the public) benefits from these services.
2. How It’s Tracked in Your Books: Contracts are tracked as money earned for services provided. You don’t count this money as income until the work is done and you’ve sent an invoice for payment.
3. Legal Obligations: With contracts, you have to fulfill specific requirements. If you don’t, there could be legal consequences, and you might lose the funding.

Grants: Gifts to Support Your Mission

What Are Grants?

Grants are funds given to your nonprofit to support your mission. Unlike contracts, grants are often given without the expectation of receiving specific services or goods in return.

Key Points About Grants:

1. Who Benefits? The main purpose of a grant is to help your nonprofit achieve its goals. The funder may benefit from a report or presentation, but the primary goal is to support your work.
2. How It’s Tracked in Your Books: Grants are usually recorded as income as soon as they are awarded, meaning you can count the money right away, depending on the grant’s terms.
3. Legal Obligations: While grants come with fewer strings attached than contracts, you still need to use the money according to the funder’s guidelines. Not following these rules can affect your chances of getting future funding.

Why These Differences Matter for Nonprofit Bookkeeping:

Knowing whether your funding is a contract or a grant is important because it affects how you track and report your finances. Misunderstanding these distinctions could lead to errors in your financial reports, creating problems with compliance and future funding.

How an Outsourced Bookkeeper Can Help:

Keeping track of contracts and grants can be tricky, especially if you’re unsure how to handle the different rules. That’s where an outsourced bookkeeper comes in. At Fisher Bookkeeping, we specialize in helping nonprofits manage their finances. Whether you’re dealing with contracts, grants, or both, we’re here to make sure your books are accurate and your nonprofit stays on track. Please schedule a Consultation with us today