The proper setup up of the chart of accounts for nonprofits is the critical first step in getting started with your nonprofit fund accounting system.
Benefits of Chart of Accounts for Nonprofits
In all accounting systems, the primary purpose is to make reporting easier. What sets nonprofits apart from for-profit accounting systems is segmenting by fund.
The main purpose of the chart of accounts for nonprofits is to categorize all of the financial transactions for your organization. This makes reporting and generating financial statements easier. Properly setting up your chart of accounts is essential for creating meaningful and relevant internal controls as well as external reports to outside funding sources.
Since accountants are typically very meticulous about numbers, the chart of accounts is numeric and follows a logical order. This makes it easier to sort accounts by their assigned categories for reports and when locating specific accounts.
Five Categories of Nonprofit Chart of Accounts
- Assets are what you own, such as cash, receivables, investments, prepaid expenses, inventory, and fixed assets.
- Liabilities are what you owe, such as payables, accrued expenses, notes payable and deferred revenue.
- Net Assets or fund balances represent the net worth of your organization.
- Revenue is money coming in from donations, program services, grants, fund raising event revenue, and investment income.
- Expenses are money going out for salaries, payroll taxes, professional services, rent, utilities, travel and so on.
In Accounting 101 we were taught to follow the following logical order:
- Current Assets 1000-1999
- Liabilities 2000-2999
- Net Assets 3000-3999
- Revenue 4000-4999
- Expenses 5000-9999
Usually your account numbers length can be from three to five digits long, depending on the number of account you need.
Salaries can be account number 500 or 5000.
Nonprofit organizations need more than a simple chart of accounts. They need to segregate activity by at least two more layers.
- Identify your net assets or funds.
- Identify your functional area for program and support services.
- Identify the account for assets, liabilities, net assets, revenue and expenses.
Some nonprofits need additional layers to identify funding sources, or grants, or projects within programs.
The minimum account number format to effectively report on all financial aspects of a nonprofit organization would be three segments:
- Fund Segment – Identifies your funds – Unrestricted, Temporarily and Permanently Restricted.
- Cost Center Segment – Identifies the functional area, department, grant, funding source, program.
- Account Number – Identifies the individual account. Cash, payables, revenue and expenses.
A nonprofit’s chart of accounts is like a very efficient filing system. You have separate file cabinets for each of your funds, unrestricted, temporarily restricted and permanently restricted. Each drawer of the file cabinet is your functional area for programs and support services. Files inside each drawer represent your accounts for assets, liabilities, revenue and expenses. An efficient filing system will make it easier to generate accurate and meaningful financial statements.
When setting up your nonprofit’s accounting system, make sure you use a software system that easily allows you to set up your filing system with all of the appropriate drawers and files you need to report on your financial activity.
Is your nonprofit organization having trouble generating meaningful financial statements? Let us know if this is frustrating by leaving a comment.