A good nonprofit chart of accounts can help you avoid a lot of confusion and misunderstandings when it comes to keeping up with all of your important financial information. As the director of a nonprofit (or other high-level leader), you regularly provide your board and donors with reports about how the organization is doing. It is in your best interest to make sure what they want to know can be presented clearly and easily.
If making your life easier as a nonprofit leader sounds like a good idea to you, keep reading to learn how valuable a nonprofit chart of accounts can be.
Nonprofit Chart of Accounts
In a recent post titled “Unraveling Nonprofit Financial Statements to Help Your Organization Do Even More Good,” we discussed the 4 essential reports your organization needs to generate regularly:
- Statement of Activities (Income Statement) – revenue and expenses over a specific period
- Expense Statement – a more detailed version of the expense section in your Statement of Activities, usually broken down into categories of Management/Administration, Fund Raising, and Programs
- Cash Flow Statement – a standard report similar to any for-profit business
- Statement of Financial Position (Balance Sheet) – a document showing your organization’s “net assets”
Each document serves a different role in helping you and those you report to understand the financial health of your nonprofit. For all of these financial reports to make sense, though, they need to be able to “talk” to one another…i.e. have a consistency that allows a reader to move back and forth between them seamlessly.
Creating that unity and clarity is the job of your “Chart of Accounts.”
Confusing financial reports and hard-to-understand documents only create stress that becomes a distraction from more important tasks.
A Chart of Accounts (COA) isn’t required like the 4 reports, but it is an essential tool for your team, your board, and even your donors to better understand everything your organization does with its money. Clarity helps you avoid confusion and paves the way for success. Here’s how a good Chart of Accounts does that.
First, let’s point out what it does not do: it does not list every financial transaction. Instead, it breaks all of your nonprofit’s accounts into categories (Assets, Liabilities, Equity, Revenue, and Expenses) that help them stay organized and make sense to people who need to use your financial information to make better decisions.
Then, a good COA will give each account a name, number, and category type. While there isn’t a standard format for COA numbering, most nonprofits follow a similar pattern like this:
- 1000 Assets
- 2000 Liabilities
- 3000 Equity or Net Assets
- 4000 Revenue
- 5000 Expenses
Your organization may also choose to add other categories like Grants, Donations, Events, and Program Revenue that become subcategories of the major ones listed above. If you aren’t sure where to place extra categories, your CPA can help you set up a COA that fits your situation best.
For example, Grants are a source of income for nonprofits. Your COA might list them under the 4000 category of “Revenue” and give them the number “4100”. You could then further subdivide the Grants category based on where the grant came from, and your numbering would expand to reflect that relationship:
- 4110 Government Grants
- 4120 Corporate Grants
Every nonprofit is unique. Therefore, your exact numbering system will be as well. The key is to make sure that it is all organized in a way that makes logical sense.
Notforprofitaccounting.net has created a great PDF with a sample COA that shows how your organization could set one up.
Unified Chart of Accounts
You want to be sure that your COA is unified. By that, we mean
The first step in creating a truly useful COA is to define the needs and objectives of your organization. Nonprofithub.org offers several questions that can help you do that:
- What financial reports do we need to create?
- What information must our financial reports include?
- What level of detail does each financial report require?
- Are there any specific regulatory and compliance requirements for the reports?
- Will grant reports require specific accounts for separate transaction types?
- How many accounts do we need per financial transaction and what level of detail per account?
- Do we need to track financial information for multiple locations and/or departments?
- How frequently must we generate financial reports and who will use them?
- What are the (KPIs) we need to track and how will they get reported?
Nonprofit Expenses List
You already know that nonprofits are nothing like regular “for-profit” businesses. While there are some similarities (both require income and both have expenses), nonprofits are often unique in how they receive and spend money.
Having an accurate nonprofit expenses list is a vital function of your accounting process. Which is why it is also a key part of your COA.
Nonprofit expenses are broken down into natural and functional categories. Common natural nonprofit expenses include:
- Rent
- Salaries/Wages
- Travel
- Office Supplies
Functional expenses cover such subcategories as:
- Programs
- Management
- Fundraising
You’ll want to be sure that your COA clearly distinguishes these different types of expenses so that your board and supporters can easily see how funds are being used to accomplish your organization’s mission. (Tip: If you use IRS Form 990 or 990-EZ, you can set up your expense list to mirror the categories listed there so that things line up easily at tax time.)
Unified Chart of Accounts Challenges
Setting up a COA has many benefits, as we’ve mentioned. Your organization can enjoy:
- Better financial transparency
- Clarity in reporting
- Easier decision-making
- Reduction of errors
However, adopting and implementing a COA can sometimes include a few challenges.
- Training – Anytime you introduce something new to your team, there will be a period when people have to learn how to use it. This training takes time and patience. In addition to the “nuts and bolts” of a COA, make sure your team understands the why behind it so you can maximize the benefits of it.
- Integration – Depending on what accounting software or system your organization uses, integrating a COA could be seamless or frustrating. Be sure that you work with a good CPA firm that has lots of experience with nonprofits so make the transition as stress-free as possible.
- Costs – The time it takes to train your team, update software, and dial in your accounting processes will cost money. Make sure your nonprofit has budgeted for it. In the long run, however, the benefits of having a good COA as part of your financial management strategy will far outweigh any initial expenses.
Helping Nonprofits Succeed
Running a nonprofit is definitely the kind of thing you do because you believe in the good your organization can do in your community. Confusing financial reports and hard-to-understand documents only create stress that becomes a distraction from more important tasks.
That’s why our team of financial experts has been committed to helping dedicated nonprofit managers for over 40 years now. We love getting to partner with people who make the world a better place.
To learn how we can help your organization navigate your taxes and financial records, schedule a call today. P.S. – Be sure to also check out another post we did just for you: “Accounting For Nonprofits (A Complete Guide To What You Need To Know.”)
