For an excellent summary of the special accounting rules affecting Nonprofit organizations Look at these guide lines published by Beta Alpha Psi (the honor organization for financial information students and professionals)
Go to this link to see the full guide: Special Issues Relating to Implementation of FASB Statements 116, 117, and 124
Here is what they say about Restricted Funding:
Frequently, donors stipulate how their gifts are to be used by placing restrictions on them. SFAS No. 116 requires recognition of contribution revenue upon the transfer of an economic benefit, usually the receipt of either the contribution (cash or other economic benefit) or a pledge (a promise to make a contribution in the future). Restrictions may be permanent, such as the establishment of an endowment in perpetuity, or they may be temporary, such as for next year's operations or a specific project.
The underlying concept of SFAS No. 116 is that receipt of restricted contributions does not amount to incurring a liability, but merely accepting limits on the future use of the contributions. The concept is based on the belief that adequate disclosure of donor-imposed restrictions and properly stated liabilities is more important than matching revenue and expenses.
Here is what they say about the classifying certain grant income as "contribtions" or "earned income"
.... However, many not-for-profit organizations receive "grants," "awards," or "sponsorships" that on the surface appear to be restricted contributions, but are in substance reciprocal or earned revenue transactions, because they amount to a contract for the purpose of services by the grantor or sponsor. This type of earned revenue can usually be identified by provisions that stipulate that the organization will receive a fixed amount per unit of service (such as per meal, per bed-day, etc.). Frequently, under such a contract, the organization must send the grantor a "voucher", which amounts to a statement of services provided and an invoice for the amount of the grant that was earned that month. The vouchers should be recorded as receivables. Sometimes, a grantor gives an organization an "advance" under the contract, knowing that payment for each month's voucher will not be paid for weeks or months; since the transaction is reciprocal, these advances should be recorded as deferred revenues (liabilities).
Go to this link to see the full guide: Special Issues Relating to Implementation of FASB Statements 116, 117, and 124