What Is Subvention Income?
Subvention income is the amount of revenue that a not-for-profit organization is paid in order to cover the organization's annual operating expenses. Subvention income might be a grant or subsidy to a non-profit institution from the government in exchange for research or some type of service.
- Subvention income is the money earned by a not-for-profit that is used to cover overhead and other costs of operations.
- Sources of subvention income are often in the form of grants provided by governments or other funders.
- Because they are not-for-profit, organizations receiving subvention income must use those funds for specific purposes.
Understanding Subvention Income
In some contexts, subvention income is a term for grant money or aid received from governmental sources or private organizations. Depending on the country, this type of income may or may not be taxed. If the income has been awarded to the non-profit, there might be stipulations that come with the money. In other words, specific conditions might be stated as to how the funds can be used.
Non-profits have slightly different accounting rules as compared to for-profit companies. All revenue and expenses are tracked, and separate accounts are created to track subvention income from different sources. Although there is no profit per se for non-profit organizations, they can have either a surplus or deficit of funds at the end of a period, which is called a change in net assets. The surplus is typically transferred to a capital account and recorded on the balance sheet.
Calculating Subvention Income
Although there is no set formula for subvention income that fits all non-profit organizations, the amount of income that is received is often based on the number of services that the organization provides.
For example, educational institutions might receive a grant or aid based on the number of students enrolled.
Example of Subvention Income
Let's say a public university's student union is due to receive grant money or income from the state government. The amount of subvention income might be based on the number of students that have fully attended the educational institution that year.
Another example could be if a non-profit research institute that's awarded $1 million from the government whereby the funds are to be used only for scientific research.
Subvention Income vs. Accumulated Income
Accumulated income includes the portion of net income that is retained by a corporation instead of being distributed as dividends. Any accumulated income is typically used by the corporation to reinvest in its principal business or to pay down its debt. Accumulated income is also called retained earnings and appears under shareholder's equity on the balance sheet.
Subvention income is a term for revenue that is used to cover expenses and can be grant money or aid received from governmental sources. It is not accumulated revenue like retained earnings, which is akin to a corporation's savings account that accumulates excess profit that has not been paid to shareholders as dividends.
Limitations of Using Subvention Income
As with any corporation, investors should track revenue and expenses to be sure that is it being managed effectively. A limitation of subvention income is that a non-profit organization might not manage its expenses and ultimately use up the income. It's important that non-profits adequately disclose the use of the funds including any expenses the funds were used to pay.
Investors can monitor a non-profit organization's statement of activities to see the sources of revenue and the expenses of the company.