First, a clarification regarding Costs and Expenses
What's the difference? The terms seem to be used interchangeably, but an accountant will explain to you how they are not precisely interchangeable. For an explanation by a real accountant, Accounting Coach has a couple of blog posts that should fill the bill: Post 1 and Post 2. Enjoy.
However, for the practical purposes of this website, it's relatively safe to use the terms interchangeably, especially when discussing issues like cost allowability and cost allocation. So, in general, costs = expenses.
As noted in Basic Financial Topics for Nonprofits, expenses and revenue enjoy a very interesting relationship in the cost reimbursable grant model.
This is discussed at About Cost Reimbursement.
Expense & Revenue in the Cost-Reimbursement Model: An Important Note
When a grant is funded by the reimbursement of costs, expenses are converted to revenue upon reimbursement by the donor.
This leads to an unfortunate conflation of revenue source with cost objective in the term "grant".
From the perspective of most employees of nonprofits, there's no pertinent difference between the "grant" as a source of revenue and the "grant" as the funded project. The one word refers to two distinct concepts.
It's quite common for staff to speak of charging costs to the grant, and this makes sense if you're not concerned about the distinction (expense vs. revenue). But I have found it most useful to make this distinction clear.
In order to emphasize this key distinction between the revenue source and the //cost objective that it funds, I recommend adopting the following terminology:
- grant is used exclusively to refer to the revenue source
and
- project is the preferred term to refer to the cost objective.
What really happens is that you charge (allocate) an expense to the project (a cost objective), and later the Finance Department converts the expenses to revenue by seeking reimbursement under the terms of the grant (a revenue source).
Again, this distinction is most important when you start understanding cost objectives (see Cost Objectives) as they are used in cost accounting (see Cost Accounting).
This discussion leads to the About Cost Accounting topic.