Establishing a Nonprofit Chart of Accounts

Nonprofits view their?accounting processes?through an accountability lens rather than one based solely on profitability and revenue generation as used by the for-profit world. This is because they reinvest all funds back into their organization and mission. Plus, nonprofits need to allocate their expenses according to various restrictions and stipulations set by their generous contributors. Naturally, these factors mean nonprofits must leverage a number of systems and reports unique to the sector to keep their finances well organized.

The foundation to effective reporting at these organizations is the nonprofit chart of accounts. The chart of accounts (COA) tracks your various ledgers and everything your nonprofit does financially.

Because the COA compiles so much information, this important resource can be daunting to create and challenging to keep up with, especially if you don’t fully understand its usefulness. We put together this guide to help nonprofit professionals like you better understand and compile a chart of accounts for your organization. We’ll cover the following key topics:

1. What is a Nonprofit Chart of Accounts?
2. Importance of a Nonprofit COA
3. Steps to Create a Nonprofit COA
4. Nonprofit COA Example

Let’s get started by ensuring we’re all on the same page about the definition of a nonprofit chart of accounts.

What is a nonprofit chart of accounts?

A chart of accounts is the backbone for all accounting procedures. Accounting is based on the reports and statements that organizations use to track their finances. Your COA lists out these various accounts and ledgers to keep track of all financial transactions and elements.

This spreadsheet is manipulated and personalized to include everything your nonprofit does financially. Generally, this resource is split into five categories:

• Assets:?This category consists of what your nonprofit owns, such as cash, investments, receivables, and fixed assets.
• Liabilities:?These are what you owe, including your payables, accrued expenses, and deferred revenue.
• Net Assets:?This equals the value of your assets minus your liabilities, showing the total amount that your organization is worth.
• Income:?This describes the revenue that your organization receives, from programming and fundraising to grants and investments.
• Expenses:?This describes the money the organization spends on salaries, payroll, rent, utilities, and other costs to run the nonprofit.

The?Unified Chart of Accounts (UCOA)?was created as a standardized chart of accounts for nonprofit use. By using this resource, your accounting information will translate directly and easily into the categories required by the?IRS Form 990. However, using the UCOA is comparable to killing a mosquito with a sledgehammer, as it’s too detailed for many nonprofits. Creating a COA suited to your organization is the better option.

Importance of a Nonprofit Chart of Accounts

Your nonprofit chart of accounts operates as an extensive filing cabinet. It provides a list format of all of the accounts and ledgers at your organization, providing information about your checking account, investments, payroll, programming, utilities, and more.

Why is this resource important??Essentially, your nonprofit chart of accounts is the foundation for other financial reports. It provides a logical organizational structure for all of your financial information.

While your chart of accounts provides all of the information you need about your various funds and accounts, it can be too comprehensive to directly draw insights from on a regular basis. That’s why?nonprofit accountants?have created other types of financial documents to compile and organize the information from your COA to analyze. For instance, nonprofits compile?financial reports?such as the:

• Statement of financial position.?This statement compiles the assets and liabilities to determine the net assets and worth of any nonprofit organization.
• Statement of activities.?This statement analyzes your organization’s revenue and expenses, categorizing them by unrestricted, restricted, and temporarily restricted funds.
• Statement of functional expenses.?This statement compiles information about the expenses at your organization and characterizes those expenditures by nature or function.
• Statement of cash flow.?This statement shows how cash moves in and out of your organization, showing how much you have to spend at any given time.

The information in your nonprofit chart of accounts is used to compile these important statements. Therefore, when you have a well-organized chart of accounts, it makes creating these other reports and resources easier.

Steps to Create a Nonprofit Chart of Accounts

As mentioned above, the UCOA is often too detailed and extensive for small to mid-sized organizations. It includes a number of accounts that may be unused by your organization, crowding your chart of accounts and making it less usable.

We recommend that you create your own nonprofit chart of accounts specifically designed for your organization. Here are some steps to create your COA:

Assign COA Account Numbers

As accountants are highly logical, the various accounts within your nonprofit chart of accounts are designated with specific numbers. These numbers are grouped to make it easier to find specific accounts as money is spent or added to them, helping to keep your COA organized.

COA account numbers designate where items from your bank accounts are assigned. Don’t confuse these with your bank account numbers, as those will be a separate entity altogether. COA account numbering will aid you tremendously when you begin pulling reports. When creating your COA account numbers, use the following guide:

• 1000 - Assets
• 2000 - Liabilities
• 3000 - Net Assets
• 4000/5000/6000 - Income
• 7000/8000/9000 - Expenses

The COA account numbers will act as headers for a group of accounts. Then, within each of these designations, you’ll create subcategories. For instance, you might list out the following subcategories within your assets:

• 1010 - Checking
• 1020 - Savings
• 1025 - Investments
• 1030 - Accounts Receivable
• 1040 - Property
• 1050 - Equipment
• 1060 - Petty Cash

When you create these subcategories, group them together according to commonalities to help keep the chart of accounts organized. For example, within your Revenue category, you might designate:

• 5010 - Donations and Grants from Individuals
• 5020 - Donations and Grants from the Government
• 5030 - Donations and Grants from Foundations
• 5040 - Event Sponsorships
• 5050 - Event Ticket Sales
• 5060 - Event Auction Sales

As you can see from the above list, the donations and grants from various sources were all lumped together. Then, event revenue items were also lumped together. This helps keep everything organized and legible throughout the nonprofit chart of accounts.

In addition, when you create your chart of accounts, leave some space between the different subcategories and categories. This allows you to add new accounts to the list in appropriate locations as your organization continues to grow. In the example above, you might decide to add?Donations and Grants from Corporations, but you would want to include it alongside the donations and grants from other sources. Therefore, it may be designated as 5035 to be sure it’s included in the right location.

Leverage Comprehensive Software

A nonprofit chart of accounts can easily be created in a spreadsheet or even in a standard document in list form. While many nonprofits may start off with this format, it’s much more useful to use dedicated nonprofit accounting software to set up your chart of accounts.

Comprehensive accounting software like?Quickbooks?is designed specifically for nonprofit use, which makes it easy to configure a chart of accounts for your organization. Even further, it allows your nonprofit to draw information directly from your chart of accounts to create any additional accounting reports and statements.

For instance, if you take out a loan to complete a large project, you would input the information about the loan in your accounting solution. Then, the?1010 - Checking?account in your chart of accounts would automatically update with the new loan information. Another account,?2030 - Other Loans, would also update with this new loan amount. Then, when you pull your next report, the loan amount would be reflected in the statement.

Essentially, when you leverage accounting software, you only need to include the financial input one time.?In spreadsheets, you might have to update the information in multiple places, increasing the chances of user error.

Tips for COA Upkeep

Your nonprofit chart of accounts should be logical and organized. It allows your organization to keep all of your information in a centralized location and pull from it as necessary. But if that centralized location isn’t well organized, your reports and other information will also become more challenging. To keep your nonprofit chart of accounts clean, we recommend the following tips:

• Don’t get too specific with your accounts.?Keep things simple by creating accounts that encompass enough without becoming too general. For example, don’t create a separate account for your streamers, signage, and t-shirts. Instead, include all of these in a general “event supplies” account.
• Delete unused accounts from the chart.?If you haven’t used an account in a few years and don’t plan on using it again this year, simply delete it from your COA. This keeps the accounts clean and straightforward. If you end up needing it in the future, you can always add it back in.
• Ask an accountant to look over your chart of accounts.?The last thing you want is for something to be off in your chart of accounts because it can mess up all of your other statements and reports. To be sure everything is operating smoothly, ask an accountant to review the chart of accounts you put together. Reviewing accounts to be sure everything is operating correctly is one of the?core jobs of an accountant, and one that cannot be easily done by anyone else.

If you have outdated accounts, are missing other accounts, or forget to input information, you run the risk of dirtying your chart of accounts and making it more challenging to pull information from. Instead, take proactive steps to make sure your financial information is organized and well-maintained for future reference and accuracy.

Nonprofit Chart of Accounts Example

When you’ve created your nonprofit chart of accounts, it will look like a long ledger, organized by designated numbers and sections. We’ve included an example of a nonprofit COA below. As you review this example, keep in mind that your organization will need to make adjustments according to your programs and specific financial information.

Here’s what your nonprofit chart of accounts might look like:

Assets

• 1100 - Checking
• 1200 - Savings
• 1300 - Investments
• 1400 - Accounts Receivable
• 1410 - Grants Receivable
• 1420 - Pledges Receivable
• 1500 - Property
• 1600 - Equipment
• 1700 - Petty Cash
• 1800 - Notes/Loans Receivable

Liabilities

• 2100 - Accounts Payable
• 2200 - Accrued Salaries
• 2300 - Accrued Employee Benefits
• 2400 - Accrued Payroll Taxes
• 2500 - Accrued Property Taxes
• 2600 - Unearned/Deferred Revenue
• 2700 - Short-Term Notes & Loans Payable
• 2800 - Line of Credit
• 2900 - Government Owned Fixed Liabilities

Net Assets

• 3100 - Unrestricted Net Assets
• 3200 - Temporarily Restricted Net Assets
• 3300 - Permanently Restricted Net Assets

Income

Contributions

• 4100 - Individual Contributions
• 4200 - Corporate Contributions
• 4300 - Legacies and Bequests
• 4400 - Federal Grants
• 4500 - State Grants
• 4600 - Local Government Grants
• 4700 - In Kind Contributions

Earned Revenues

• 5100 - Program Service Fees
• 5200 - Membership Dues
• 5300 - Investment Revenue
• 5400 - Event Sponsorships
• 5410 - Event Ticket Revenue
• 5420 - Event Auction

Other Revenues

• 6100 - Net Assets Released From Restriction
• 6200 - Unrealized Gain
• 6300 - Miscellaneous Revenue

Expenses

Personnel Expenses

• 7100 - Salaries and Payroll
• 7110 - Payroll Taxes
• 7120 - Health Insurance
• 7130 - Retirement Benefits
• 7200 - Depreciation Expense
• 7300 - Contract Services

Non-Personnel Expenses

• 8100 - Office Supplies
• 8200 - Rent
• 8210 - Utilities
• 8220 - Real Estate Taxes
• 8230 - Equipment Purchase and Maintenance
• 8300 - Travel
• 8400 - Fundraising Expenses
• 8500 - Marketing and Promotion

Non-GAAP Expenses

• 9100 - Fixed Asset Purchases
• 9200 - Payment to Affiliates

Your nonprofit chart of accounts is the centralized spreadsheet in which you keep all financial data. It’s what you can pull information from to create other accounting reports and statements. Understanding this resource and its importance will help organizations like yours to create and maintain your nonprofit COA.

If you need help configuring or keeping up with the key information in your chart of accounts, reach out to a nonprofit accountant for assistance. Better yet, let an accountant do all of the heavy lifting for you! You can outsource your accounting needs to the?experts at Jitasa?and ensure your chart of accounts as well as other accounting documents are always created correctly and maintained consistently.

Looking for more information about nonprofit accounting and financial management? Check out these additional resources:

• Form 990 Filing: Your Essential Guide to Nonprofit Taxes. One reason you need to keep your finances as organized as possible is to remain compliant with state and federal regulations. Learn more about your federal tax forms in this guide.
• Nonprofit Accounting: A Guide to Basics and Best Practices. Our nonprofit accounting guide walks through the definition of fund accounting as well as the statements and documents that you must pull from your COA. Read about it in this article.
• Grant Management: A Nonprofit's Complete Guide. If your nonprofit relies on grants as one of your main revenue accounts, it can be challenging to keep everything organized. This guide will help you create an effective grant management system.