The first step is to set up an account in the chart of accounts in Xero in order to be able to recognise the grant income. The account type should be set to Other Income (as the grant is not part of the company’s usual sales), and the default VAT code of the account should be set as ‘no VAT’, as grant income falls outside the scope of VAT.
The bank receipt can then be posted to this new grant income account. It is a good idea to upload the support for the grant receipt to the Xero entry.
Further accounting entries may then be needed depending on the terms of the grant. Common types of grant and the respective accounting treatments are explored below:
An unconditional grant
The grant does not require the company to undertake any specific action to receive it. The grant can therefore be recognised immediately as income. No further accounting entries are needed from the initial bank posting.
A conditional revenue grant
A grant may be applied for to cover specific revenue expenditure the business is due to incur. An example of this may be a grant received to assist the business recruit a new member of staff.
Let’s say a £10,000 grant has been received to cover £4,000 initial recruitment fees, and £6,000 training costs over a 3 month period. It is important that the income is matched to the costs in the Profit and Loss Account, as they occur.
A liability account now needs to be set up in the chart of accounts titled grant creditor (type – current liability, default VAT code ‘no VAT’) and a journal posted on receipt of the income to move the income out of the Profit and Loss Account to this liability account until the costs have been incurred.
At this point, the balance sheet is reflecting the fact that this income does not belong to the company, until the conditions of the grant have been met, ie. the specific expenditure has been incurred and paid. Once the supplier bills for the costs have been processed, the income can then be released to the Profit and Loss account from the grant creditor account.
The postings would therefore be:
- Initial £10,000 grant receipt posted to grant income on bank reconciliation (Dr bank, Cr grant income).
- Dr grant income £10,000, Cr grant creditor account £10,000 to move the grant income to the balance sheet until the costs have been incurred.
- Release of £4,000 grant income on receipt of the recruitment fee bill – Dr grant creditor £4,000, Cr grant income £4,000.
- Release of £2,000 training costs for each of the 3 months to match the training provider bills received – Dr grant creditor £2,000, Cr grant income £2,000. A repeating journal can be set up for this to end at the end of the third month, rather than posting three separate journals.
- At this point the grant creditor account should be £nil and the full £10,000 grant income has been recognised in the Profit and Loss Account.
The conditional grant may only cover a certain percentage of the costs, eg. a £5,000 grant to cover 50% of the recruitment and training costs, with the employer required to meet the remaining 50% cost. In this case the full £5,000 grant is still moved to the grant creditor account, and the journal postings to release the grant to the income account are calculated to match 50% of each expense, ie. a £2,000 release on receipt of the £4,000 recruitment fee bill, and 3 x £1,000 release for the 3 month’s £2,000 training costs. This way, the grant income is correctly spread across the costs it relates to.
For grant conditions, which are non-financial, performance against the conditions needs to be tracked so the grant can be released to the Grant income account at the time the company successfully achieves the condition.
A conditional capital grant
A grant may be received, which covers all or part of the cost of purchasing a new asset to be used in the business for a period of time.
In this case, the grant income is moved to the grant creditor account as above, but is released to the grant income account over the expected life of the asset, rather than on purchase of the asset. This is designed to match the grant income to the asset depreciation cost in the Profit and Loss Account over time.
As an example, a £60,000 grant has been received towards the cost of a £300,000 piece of machinery. The machinery is expected to last for 10 years. The machinery is added to fixed assets and depreciated over 10 years. In the same way, the £60,000 grant income is moved to the grant creditor account and is released to the grant income account over 10 years, as follows:
- Initial £60,000 grant receipt posted to grant income on bank reconciliation (Dr bank, Cr grant income).
- Set up a repeating journal to Dr grant income £500, Cr grant creditor account £500 per month for 120 months from the date the asset is purchased.
If you need help with this, or with other advice, then please get in touch with our accounting team.