How To Record Revenue And Receivables When Using Cash-Basis Accounting.

If your organization is subject to a formal audit then you probably need to be
using full accrual accounting, non profit cpa. However, many small organizations use either a
cash-basis accounting approach or what is called a modified cash-basis
approach. The modified approach uses primarily a cash approach with some
accruals, i.e., receivables and payables. A typical example is a small
organization whose livelihood is based on grants. At the beginning of each year
the grant or grants are awarded but the money is received later in the year. This
could also be true for contracts that are awarded initially but the money is not
received until a certain amount of work is finished. The organization wants to
keep track of cash coming in and cash going out. They also want to keep track
of grants, contracts or pledges that are still outstanding. The following is an easy
way for you to keep track of this type of activity:
Let’s say that you were awarded a $50,000 grant. The day you received the
formal document you should record the grant on the books using a general
journal that looks like this on the modified cash basis:
Grants Receivable 50,000.00
Deferred Revenue 50,000.00
When you receive a portion of the grant money, say, $10,000 record it like this:
Cash 10,000.00
Grants Receivable 10,000.00
Copyright © 2008 John W. Day 6
But, don’t forget there is another step to take:
Deferred Income 10,000.00
Grant Revenue 10,000.00
Let’s review what you have accomplished with these journal entries. First you
recorded the full amount of the grant, but because you hadn’t yet received any
money you deferred the revenue. The Grants Receivable is an asset and the
Deferred Revenue goes in the liability section of your balance sheet. Second,
when cash was received you recorded the increase to cash and decreased the
Grants Receivable because you now only have $40,000 remaining. Third, since
you actually received $10,000 in cash you can report that as revenue under the
category of Grants. You no longer have $50,000 of deferred revenue so you
decreased it by $10,000 to accurately reflect $40,000, which is now the case.
This is not that complicated to understand and it is a handy tool that helps keep
track of what is actually going on in the organization.

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