Welcome to Feldesman's Grants Practice Shorts series where we discuss helpful tips and strategies in common areas of federal grant management. Be sure to check out our other installments on our Grants Practice Shorts page.
The last two weeks we addressed allowable costs under Federal grants and allocability of costs. We now turn to the requirement that a grantee be able to show how it used the awarded federal funds. This requirement is set forth formally at 2 C.F.R. § 200.302(b). To satisfy it, a grantee must generally have a financial management system with the following basic components:
- General Ledger
- General Journal
- Chart of Accounts
- Payroll System
General Ledger
The general ledger is an organization's "principal and controlling ledger . . . containing individual or controlling accounts for all assets, liabilities, net worth items, revenue, and expenses." Merriam-Webster entry for "general ledger," available at https://www.merriam-webster.com/dictionary/general%20ledger (last visited Jan. 18, 2021).
General ledgers are now generally maintained through electronic systems and grantees are encouraged to find software suited to the size and complexity of operations.
General Journal
The general journal is "[t]he master journal that all company transactions or journal entries are recorded in." Entry for "general journal" at myaccountingcourse.com, available at https://www.myaccountingcourse.com/accounting-dictionary/general-journal (last visited Jan. 18, 2021).
A general journal will generally be part of the accounting software used to maintain an organization's general ledger. Expenditures such as payroll entries associated with various funding sources (in other words, cost objectives) may, and typically will, be tracked through (and incorporated into the general ledger through) journal entries. For grant management documentation purposes, such entries typically must be supported by additional source records showing, for example, paid invoices or payroll expenses and cost allocation arithmetic. See "adequate documentation" discussion from Allowable Costs Under Federal Grants.
Chart of Accounts
An organization's chart of accounts is "a list of account names arranged systematically and usually coded numerically or alphabetically . . . to form the general framework of the accounting system of a specific business and to establish a scheme of account classification." Merriam-Webster entry for "chart of accounts," available at https://www.merriam-webster.com/dictionary/chart%20of%20accounts (last visited Jan. 18, 2021).
For federal grantees, the chart of accounts will generally include numerical or alpha-numerical designations or codes (termed "accounts") for each federal funding source. Some grantees will further create specific accounts for specific fiscal years under each funding source. Each and every expenditure appearing in the general ledger (which, when including subsidiary ledgers, should include each and every expenditure of the organization) will be notated with a code directly or indirectly identifying the associated cost objective.
The level of detail of a grantee's chart of accounts may vary, so long as it is sufficient to track funds accurately by source and application as required by 2 C.F.R. § 200.302(b).
Payroll System
The payroll system is the system of records and processes used to (i) determine and document amounts due employees, (ii) determine and document associated fringe benefit and tax expenses, and (iii) issue checks and paystubs to employees. Many grantees outsource this function to third party vendors.
Vital to appropriate charging of payroll costs to a grant, grantees need some degree of supporting "time and effort" documentation to proportionally allocate the payroll costs reflected by their payroll records to the various activities ("cost objectives") that benefited from their compensated effort. § 200.430(g). Such documentation should break down the costs on a proportional percentage basis. Journal entries will be made to capture the proportional payroll expense associated with each funding source (i.e., each federal funding source account listed in the chart of accounts).
A grantee's financial management system should reflect the reasoned judgment of professionals familiar with the organization, be anchored by written policies and procedures, provide for adequate checks and balances, and ensure appropriate record-keeping.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
