Receiving grant funding is a fantastic opportunity for charities and not-for-profit organisations. Often though this funding comes with strings attached - namely, reporting and accountability. Funders want to know how their money is being used, and you want to make sure you're meeting those expectations without drowning in admin.
That’s where Xero Tracking and a well-structured Chart of Accounts come in. These tools can turn what feels like a reporting headache into a streamlined, transparent process.
Why Grant Reporting Matters
Whether you're receiving funding from a government agency, local council, or private organisation, you're likely required to:
Track how the funds are spent
Report on outcomes or milestones
Provide financial statements or summaries
Failing to meet these requirements can jeopardise future funding or even require repayment. So, getting your systems right from the start is key.
How Grants Are Treated in Accounting
In most cases, grants are treated as revenue in advance until the conditions of the grant are met. This means:
The funds are recorded as a liability when received (because it may need to be repaid in part or in full if you don't meet all the requirements set out in your funding document).
As you spend the funds in line with the grant agreement, the liability is reduced and recognised as income.
This approach ensures your financials accurately reflect your obligations and prevents overstating income before it's earned. You need to check your grant conditions and timeframes to confirm if this is how it needs to be treated. If you aren’t sure reach out now to your accountant or trusted advisor (or contact us at Varntige) and get it done right from the start and save a big headache later at Annual Return time.
Step 1: Set Up Xero Tracking Categories
Xero’s Tracking Categories let you tag transactions with custom labels. This is perfect for separating grant-related income and expenses from your day-to-day operations.
Example Setup:
Tracking Category Name: Funding Source
Options: “MBIE Grant 2025”, “Local Council Grant”, “General Operations” create a new name for each new source of funding received.
This allows you to run reports filtered by funding source, giving you instant visibility into how each grant is being used.
Step 2: Structure Your Chart of Accounts for Clarity
Your Chart of Accounts is the backbone of your financial reporting. Structuring it with your individual organisation and grant reporting in mind makes it easier to categorise expenses and income correctly. Most organisations start with the same generic Chart of Accounts but these often don’t reflect what you actually do?
Tips:
Create specific income accounts for each main source of income (e.g., “Grants”, “Product Sales”, "Event Sales")
Create expense accounts that align with your funding agreement deliverables and what your organisation actually does (e.g., “Training Costs”, “Film production costs”).
Avoid lumping income or expenses into general categories like “Miscellaneous” or “General Expenses”.
This structure ensures that when you run reports, everything is clearly segmented and easy to reconcile. If you need help creating or updating your chart of accounts to better align with your organisation get in touch to see how we can help - sometimes a fresh perspective can help gain clarity.
Step 3: Combine Tracking & Chart of Accounts for Powerful Reporting
When used together, Tracking Categories and a smart Chart of Accounts give you the ability to:
Generate Profit & Loss reports by funding source
Track budget vs actuals for each grant
Provide funders with clear, professional reports without manual sorting
You can even export reports directly from Xero to share with funders or use them in milestone updates.
Bonus Tip: Use Xero Budget Manager
If your grant has a budget attached, Xero’s Budget Manager lets you set targets and monitor performance. With multiple budgets you can monitor your overall performance as well as keeping on budget with your grant and project spending also. Combine this with tracking and account codes, and you’ve got a full accountability toolkit.
Need Help Setting It Up?
At Varntige, we help not-for-profits set up and manage Xero in a way that makes grant reporting simple and stress-free. Whether you're applying for funding or already managing multiple grants, we can help you structure your accounts and tracking to meet funder requirements with confidence.
Get in touch to book a free consultation or learn more about our Xero setup services.
