Final answer:
Private institutions record Pell Grants as a liability due to student accounts upon receipt and recognize them as revenue when applied to tuition; public institutions recognize the grants as non-operating revenue right away.
Step-by-step explanation:
Upon the receipt of $500,000 of Pell Grants, accounting treatment differs between private and public institutions. For a private institution, the receipt of the grants should be recognized as a liability due to student accounts until they are actually applied to student tuitions and fees. At that point, the liability account is reduced, and corresponding tuition or revenue accounts are credited. On the other hand, for a public institution, these grants may typically be recognized as non-operating revenue upon receipt, on the rationale that public colleges and universities often treat government grants as revenues regardless of their final use, which differs from private institutions' accounting treatment due to the nature of public funding and public accounting standards.
Given the importance of the Pell Grant program in making higher education more accessible and President Obama's efforts to increase these grants, the treatment of such funds on the financial statements of institutions is significant. This reflects the increasing investment in human capital through education versus the challenges of growing student debt burdens. The choice between recognizing grants as a liability or revenue affects the financial position and performance of educational institutions.