When accounting for government grants, different approaches are taken depending on the nature of the grant. Below are examples of accounting entries for different cases involving government grants.
1. Cost-Reimbursable Government Grant
| Scenario | Debit | Credit |
|---|---|---|
| Upon Award | No entry required | |
| As Expenses Are Incurred | Expense Account | Accounts Payable |
| Grant Revenue Receivable | Grant Revenue | |
| As Reimbursements Are Received | Cash | Grant Revenue Receivable |
2. Government Grant Recorded as Deferred Income (Example)
ABC Ltd. has received a grant to build a water treatment plant and will recognize the grant as deferred revenue and amortize it over 8 years to match depreciation expense. The accounting entries are as follows:
| Scenario | Debit | Credit |
|---|---|---|
| Receipt of Grant (CU 40,000) | Cash/Bank (CU 40,000) | Deferred Income (CU 40,000) |
| Recognition in P&L in 20X2 | Deferred Income (CU 2,500) | Income from Government Grant (CU 2,500) |
3. Government Grant Deducted from Asset (Example)
ABC Ltd. can deduct the grant from the book value of the water treatment plant. In this case, the depreciation charge will be automatically reduced.
| Scenario | Debit | Credit |
|---|---|---|
| Receipt of Grant (CU 40,000) | Cash/Bank (CU 40,000) | PPE – Water Cleaning Station (CU 40,000) |
| Depreciation Recognition in 20X2 | Depreciation Expense – Water Cleaning Station (CU 3,750) | PPE – Water Cleaning Station (CU 3,750) |
4. Grant for Ecological Measures (Expense Reimbursement)
ABC Ltd. received a grant to reimburse the costs of environmental measures taken between 20X2 and 20X5. The grant is recognized in profit or loss when incurred.
| Scenario | Debit | Credit |
|---|---|---|
| Receipt of Grant (CU 10,000) | Cash/Bank (CU 10,000) | Deferred Income (CU 10,000) |
| Recognition in P&L in 20X2 | Deferred Income (CU 2,143) | Income from Grants (or relevant expense) (CU 2,143) |
5. Grant for Expenses Already Incurred (Previous Periods)
ABC Ltd. receives a grant in 20X2 for expenses already incurred in 20X0 and 20X1. The entire grant is immediately recognized in profit or loss.
| Scenario | Debit | Credit |
|---|---|---|
| Receipt of Grant (CU 3,000) | Cash/Bank (CU 3,000) | Income from Government Grant (CU 3,000) |
These accounting entries illustrate the different ways in which government grants are recorded in accounting records. Each and every entry depends on the nature of the grant and its intended to be use, which can affect financial reporting differently.