How to Track Restricted Funds and Grants in QuickBooks

The cleanest way to track restricted funds and grants in QuickBooks is to use classes: create a class for each grant or restricted fund, tag every deposit and expense that touches it, then run reports by class to show a funder or your board exactly how the money was used. QuickBooks is not fund accounting software out of the box, but classes give you fund-level tracking inside one company file. This guide covers setting up the classes, recording grant income and spending, releasing funds from restriction, and reporting by fund so your numbers tie back to the bank.

All of this depends on having every account in QuickBooks first, including grant and reserve accounts that often will not connect to a bank feed. If a restricted account only gives you a PDF, the tool at the top of this page can convert a nonprofit bank statement to QuickBooks so grant deposits and spending are in the file, ready to tag to a fund.

What is the difference between restricted and unrestricted funds?

Restricted funds are contributions or grants a donor requires you to spend on a specific purpose or within a specific time, while unrestricted funds can be used for any part of your mission. A foundation grant for a youth program is restricted; a general donation is unrestricted. The distinction matters because you have to be able to show that restricted money was actually spent on what it was given for, and that means tracking it separately in QuickBooks from the day it arrives.

Under nonprofit accounting standards, restricted amounts are reported as net assets with donor restrictions and released to unrestricted once you have met the purpose or time condition. In QuickBooks, classes are how you keep that visible without a separate ledger for each grant.

How do I set up class tracking for funds in QuickBooks?

Turn on class tracking, then create one class per grant or restricted fund. In QuickBooks Online, go to Settings, Account and settings, Advanced and switch on Track classes; in Desktop, enable Class tracking under Preferences, Accounting. Then open the class list and add a class for each restricted grant or fund, plus one for unrestricted or general operating. From then on, every transaction gets a class so QuickBooks can report income and expense by fund.

Keep the class list focused: a class for each active grant and each standing restricted fund, not a class for every donor. Too many classes are as hard to report on as none. Retire a grant's class once it is closed out and reported.

How do I record a grant deposit in QuickBooks?

Record a grant deposit as income coded to a grant or contribution income account and tagged to that grant's class. When the grant payment hits your bank, enter it as a deposit or sales receipt, choose the income account, and select the grant class. If you converted the bank statement, the deposit is already in QuickBooks; you just open it and add the class. That single tag is what lets QuickBooks later show every dollar of that grant, in and out.

If a grant is paid in installments, tag each installment to the same class so the fund total builds up correctly. Attach the award letter or agreement to the first deposit so the terms stay with the record.

How do I track spending against a grant?

Tag every expense paid from the grant with the same class you used for the grant income. Whether it is payroll for a program staffer, supplies, or a subcontractor, add the grant class to the transaction so QuickBooks accumulates spending against that fund. When you run a report by class, the grant column shows income received and expense spent, and the difference is what is left to spend or to return.

For expenses that split across grants, such as a shared staff member, use more than one class line on the transaction to allocate the cost. Doing this as you go, rather than at year-end, is what keeps grant reporting from becoming a reconstruction project. Many grant costs come from vendor invoices, and pulling the line items off each one, for example by extracting the invoice data to a spreadsheet, makes it easier to split a single invoice across the right funds before you enter it.

How do I release funds from restriction in QuickBooks?

You release funds from restriction once you have met the grant's purpose or time requirement, by recording a journal entry or transfer that moves the amount from net assets with donor restrictions to net assets without restrictions. Practically, many nonprofits use two income accounts and a pair of offsetting lines tagged to the fund class to show the release, so the statement of activity reflects that the restriction has been satisfied. The spending you tagged to the class is the evidence the condition was met.

If your reporting needs are simple, tracking by class and reporting released amounts at period end may be enough. If they are complex, this is the point where a nonprofit-experienced accountant is worth the fee, because the release entries drive your audited statements.

How do I report on funds for the board and Form 990?

Run a Profit and Loss by Class (Statement of Activity by class) to show income and expense for each grant and fund side by side. In QuickBooks Online this is Reports, then Profit and Loss by Class; in Desktop it is Reports, Company and Financial, Profit and Loss by Class. Filter to the period you are reporting and you get a clean fund-by-fund view for the board packet, a grant report to a funder, or the figures behind your Form 990. Because every line was tagged, the totals reconcile to the bank.

Give the board this report each meeting rather than a single lump P and L, so they can see restricted money is being used as intended. It is also the fastest way to spot a grant you are underspending before the deadline to use it passes.

Keep fund tracking tied to real bank activity

Class tracking only works if every account is in QuickBooks and reconciled, including the restricted and reserve accounts that rarely connect to a feed. Convert each account's PDF statement so grant deposits and program spending are in the file, tag them to the right fund, then reconcile. For the reconciliation step, see the guide on bank reconciliation from PDF statements, and if you keep books for several organizations, the PDF to QBO converter for accountants converts any client's statement so their fund reports tie out.

Set up a class for each grant, tag every deposit and expense to it, release restrictions as you meet them, and report by class. That is how a volunteer treasurer or a nonprofit bookkeeper gets true fund accounting out of QuickBooks, with numbers a funder and an auditor can trust.