Most accounting software packages provide powerful tools that can be used to store financial transactions and create financial reports for your nonprofit. A chart of accounts sets the foundation for how easy it will be to generate the information your nonprofit needs to produce meaningful reports. 

 

What is a Nonprofit Chart of Accounts? 

 

A chart of accounts (COA) represents the list of all accounts used by an organization to record transactions in its accounting system. While there is no standard nonprofit chart of accounts structure, it should be set up with both internal and external reporting requirements in mind, and include accounts specific to nonprofits, such as accounts for restricted cash, net assets, and contributions.  

 

Why is Setting Up a Chart of Accounts Important? 

 

The difference between a poorly designed chart of accounts and one that is well-designed can impact your organization’s ability to effectively provide financial reporting and analysis. When creating a chart of accounts, a common misconception is to utilize the set of accounts that comes standard with your accounting software and assume that changes can easily be made later. But it is actually not that easy to make changes later, and most likely will lead to a complete COA redesign! We recommend taking the time early on to evaluate your entity’s current and future reporting needs and design an account structure that sets your finance department up for success.   

 

Setting Up a Well-Designed Nonprofit Chart of Accounts 

 

Below are five tips for creating a well-designed nonprofit chart of accounts. 

 

1. Categorize accounts by account type – your chart of accounts should categorize each account into one of five account categories. Each category is typically assigned a range of numbers: 

  • (1000-1999) Assets – resources owned by your organization, such as bank accounts and receivables, or fixed assets like buildings or equipment 
  • (2000-2999) Liabilities – business obligations owed like payables, accrued expenses, mortgages, loans, and other debt 
  • (3000-3999) Net Assets – assets available after subtracting liabilities. Because nonprofits do not have owners, this difference is referred to as net assets (and not equity).  
  • (4000-6999) Revenue and Support – amounts earned or received as a result of sales or services and other activities that support your entity’s ongoing operations (such as program income, donations, and grants), and investment income 
  • (7000-9999) Expenses – costs incurred to operate your organization 

 

2. Create header accounts – to make your chart of accounts easier to navigate, use summary accounts called “headers” to group related accounts. They are not used to record transactions directly but instead serve to aggregate data for reporting purposes.  

For example, you might have a header account for “Cash and Cash Equivalents” under which will fall the list of your checking, savings, petty cash, and CD account balances. For financial reporting purposes, these balances will not be listed separately, but rather combined and displayed as one cash balance in your financial statements.  

 

3. Add appropriate sub-accounts – to break things down even more, use sub-accounts to track and report specific categories of assets, liabilities, net assets, revenue and support, and expenses. Unlike header accounts, sub-accounts are used to record financial transactions. Here are some typical examples: 

  • 4000 Direct Contributions – non-posting header account with sub-accounts for: 
    • 4010 Individual Contributions 
    • 4020 Legacies & Bequests 
    • 4030 Corporate Contributions 
  • 7300 Professional Fees – non-posting header account with sub-accounts for: 
    • 7310 Accounting & Audit 
    • 7320 Fundraising Fees 
    • 7330 IT Support 
    • 7340 Legal Fees 
    • 7350 Marketing Fees 
    • 7390 Temporary Labor 

 

4. Build in room for future growth – assign numbers to sub-accounts that correspond to their categories as well as their hierarchical position. For example, it is common practice to list assets and liabilities in order by “most liquid” (easily convertible to cash) to “least liquid.” Thus, a checking account should appear earlier in your list than one for investments. Then leave room for expansion by keeping your numbering system broad. For example, you could set aside 7000s, 8000s, and 9000s for expense accounts so you aren’t trying to cram all expense accounts into one limited group of numbers. 

 

5. Use your software to track the details – resist the urge to add an account every time your organization adds a new activity or program. For example, your organization only needs one “Salaries” account and does not need separate salaries accounts for each one of your programs. If using an accounting package such as QuickBooks, this can be done by creating classes to track your programs. This feature in your software might be called classes, segments, dimensions, categories, or cost centers. To see other tips for using your software to track financial reporting details, check out our recent webinar on nonprofit financial reporting. 

 

Here’s how a nonprofit chart of accounts might be structured: 

 

image showing a nonprofit chart of accounts

 

A well-structured chart of accounts ensures accurate financial tracking, supports your reporting requirements, and provides meaningful information for management, your board, and external parties such as donors and auditors. 

Your Part-Time Controller, LLC (YPTC) provides financial management services for nonprofits. We specialize in accounting services, financial reporting, and best practices for nonprofits of all types and sizes. To learn more, visit us at yptc.com.