A government received half of a $500,000 federal operating grant on December 1 of year one for year two. Which entry best records receipt of the grant funds?

• A. Debit Cash 250,000; Credit Deferred Inflows of Resources—Grant Proceeds 250,000
• B. Debit Cash 500,000; Credit Grants Revenue 500,000
• C. Debit Deferred Inflows of Resources—Grant Proceeds 250,000; Credit Cash 250,000
• D. Debit Grant Revenue 250,000; Credit Cash 250,000

Answer: (A)

This tests how a government records grants received before the period they support. When cash is received for a future period, it isn’t revenue yet; it creates a deferred inflow of resources that will be recognized as revenue in the period the funds are earned.

Because half of the $500,000 grant is for a future year, the proper entry is to show the cash receipt and establish a deferred inflow. Debit Cash 250,000 and Credit Deferred Inflows of Resources—Grant Proceeds 250,000. This reflects that the government has the cash but has not yet earned the grant, so it’s recorded as a liability (deferred inflow) to be recognized as revenue in the appropriate future period.

Recognizing revenue now would be premature, and recording the inflow incorrectly (or reversing the cash entry) wouldn’t accurately reflect the timing of when the funds become earned.