Chart of Accounts for Nonprofits: Guide to Proper Setup (2024)

Managing finances for nonprofits can be very challenging. However, the key to achieving mission goals lies in efficient financial management. One of the most important financial tools for nonprofits is a well-structured nonprofit chart of accounts (COA). Proper set up streamlines financial reporting, safeguards compliance, and tracks revenue and expenses. Above all, it provides a clear picture of your organization’s financial health.

In this blog post, we’ll delve into the ins and outs of setting up a chart of accounts, specifically tailored for nonprofits. Whether you’re an established nonprofit looking to refine your existing COA or a fledgling organization just getting started, this guide will provide the insight you need for a successful setup. Dive in with us to learn an effective way to segregate funds for seamless tracking of revenues and expenses.

What Is the Chart of Accounts for Nonprofits

A nonprofit chart of accounts (COA) is a guide that helps nonprofits classify and track expenses and revenue. A COA categorizes an expense or revenue as either “revenue” or “expense.” It is a financial document used by organizations with 501(c)(3) status to account for the money they receive and spend. Chart of accounts for nonprofits are often composed in a predetermined order. In other words, the chart of accounts is set up in a hierarchical fashion with one account leading to another account below it.

Accountants typically create charts of accounts for nonprofits based on the organization’s needs and their mission.

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 generating financial reports for nonprofits 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.

Two main benefits to implementing an account system is:

• Helps with budgeting and financial reporting for nonprofits.
• Helps maintain your nonprofit’s financial records.

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Breakdown of Chart of Accounts for Nonprofits

Assets and Liabilities

A nonprofit chart of account lists the types and amounts of assets that a nonprofit has. It also includes liabilities, which are obligations or debts incurred by a company to provide goods or services. Nonprofit organizations typically have three types of assets:

1. Cash on hand

2. Investments, such as stocks and bonds that the nonprofit owns or has a stake in

3. Property

Assets are anything owned by the organization that has economic value. The two major types of assets are current and fixed. Current assets consist of cash, marketable securities, accounts receivable (money owed to the nonprofit from people or other organizations), and inventory (goods that are for sale). Fixed assets include buildings, equipment, land.

The current asset section of a chart of account includes a column for cash, a column for accounts receivable, and another one labeled “Inventory.” The fixed asset section has columns labeled Land, Buildings and Equipment.

Net Assets

A nonprofit organization’s net assets are its total resources minus the resources that have been used up. Nonprofit organizations typically calculate their net assets at the end of each fiscal year because it is a measure of their financial health.

How does a nonprofit organization report expenses by both functional and natural classifications?

Expenses are a necessary part of running a nonprofit organization and without them, your business will not be able to function properly. They can take up a large portion of your time and resources, but as a nonprofit organization you have to ensure that they are allocated properly.

A nonprofit chart of account is a type of accounting system that tracks all the expenses incurred by an organization. In order to prepare this, one needs to categorize and allocate the expense categories before going on to allocate the specific expenses. This is known as functional accounting.

Once you have categorized your expenses, it is time to allocate them. The first step in doing this is to divide the total expenses incurred by the organization for a given period of time (e.g. a month) by the number of days in that period to get the average daily expenses incurred for that time frame.

Five Categories of Nonprofit Chart of Accounts

1. Assets are what you own, such as cash, receivables, investments, prepaid expenses, inventory, and fixed assets.
2. Liabilities are what you owe, such as payables, accrued expenses, notes payable and deferred revenue.
3. Net Assets or fund balances represent the net worth of your organization.
4. Revenue is money coming in from donations, program services, grants, fund raising event revenue, and investment income.
5. Expenses are money going out for salaries, payroll taxes, professional services, rent, utilities, travel and so on.

COA Account Numbers

A chart of accounts enables a nonprofit to report financial transactions in an organized manner and is critical for reporting purposes. The purpose of the COA account number is to identify which expense or revenue category the account belongs to.

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.

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What is a segmented chart of accounts in nonprofit accounting?

In the complex world of nonprofit accounting, accuracy and efficiency are paramount. One tool that can significantly streamline your financial management and minimize errors is a segmented Chart of Accounts (CoA). Let’s delve into what this entails and how it can benefit your nonprofit organization.

Understanding the Basics of a Chart of Accounts

At its core, a Chart of Accounts is a categorized list of an organization’s accounts that record revenues, expenses, assets, liabilities, and net assets. In the CoA, each account should have a title that indicates its type, such as “Gross Receipts,” followed by a list of all accounts within this category like “Grants Received” or “Membership Dues.”

However, the needs of a nonprofit extend beyond a simple CoA. Nonprofit organizations require a more detailed and nuanced approach to their financial tracking.

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The Need for Segregation in Nonprofit Accounting

Nonprofits must segregate their financial activity into at least two additional layers. The first layer involves identifying net assets or funds, which include unrestricted, temporarily restricted, and permanently restricted funds. The second layer calls for the identification of the functional area for program and support services. This refers to the various departments, programs, grants, and funding sources that comprise the organization.

In some cases, nonprofits may require even more layers to identify specific funding sources, grants, or projects within programs.

The Three-Segment Approach to Nonprofit Accounting

To effectively report on all financial aspects of a nonprofit, a minimum account number format with three segments is recommended:

• Fund Segment – Identifies your funds – Unrestricted, Restricted.
• Cost Center Segment – Identifies the functional area, department, grant, funding source, program.
• Account Number – Identifies the individual account. Cash, payables, revenue and expenses.

How to Assign COA Account Numbers

• Choose a 2 digit number for the account type which is not already in use and add it to “COA ACCOUNTS” on the list.
• Decide on a general fund code for the account type, and add it to “COA ACCOUNTS”.
• Fill in the Dollar Amount column with an appropriate starting balance for the account type.
• Fill in the Balance column with a closing balance from last year’s financial statements that is not negative or zero (-1).
• Fill in the Memo column with the appropriate text for this account type.

How will you track revenue and expenditures by funding source?

The Chart of Accounts should have a title that indicates the type of expense or revenue for example, “Gross Receipts” and then list all accounts belonging to this category , for example “Grants Received” or “Membership Dues.”

Nonprofit organizations need more than a simple chart of accounts. They need to segregate activity by at least two more layers.

1. Identify your net assets or funds.
2. Identify your functional area for program and support services.
3. 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.

Benefits of a Segmented Chart of Accounts

By implementing a segmented approach in your Chart of Accounts, you can significantly streamline your accounting processes and reduce potential errors. This method ensures a more accurate and transparent financial management system, providing a clear view of your financial health.

A well-structured, segmented CoA not only simplifies the tracking and reporting of financial data but also enhances decision-making capability by providing detailed insights into various aspects of the organization’s finances.

Above all, a segmented Chart of Accounts is an invaluable tool for nonprofits, helping to simplify complex financial management tasks, minimize errors, and maximize transparency and efficiency. By adopting this approach, your nonprofit organization can focus less on untangling complicated financial data and more on fulfilling your mission.

What is a Unified Chart of Accounts for Nonprofits?

A unified chart of accounts for nonprofits is a financial statement that includes all the assets, liabilities, equity and revenue or expense items. It can be used to organize revenues by type (e.g. fundraising, grants), expenses by type (e.g., staff salaries or supplies) and balance sheet items into one statement that includes all the financial information for the nonprofit organization in a single document.

The unified chart of accounts for nonprofits is designed to transfer financial statements into categories required by IRS Form 990 and other financial reporting for nonprofits.

Tips to maintain the chart of accounts

Nonprofit organizations should create an organization-specific chart of accounts. Nonprofits will need to include expenses and revenue in their COA, which requires implementing a few tips to maintain the COA.

First, nonprofit organizations should assign each expenditure and revenue to a separate account. Expenses are necessary for the general operations of the organization while revenues represent income from donors or other sources. In addition , nonprofit organizations should label each account with a three-letter acronym that indicates the type of expense or revenue.

Maintaining your chart of accounts helps to generate compliant financial reports for nonprofits. This will greatly simplify your financial reporting.

Leverage Nonprofit Fund Accounting Software

Nonprofit fund accounting software is a crucial component in the development of any organization One of the most daunting tasks for people who are new to accounting or nonprofit management can be creating an appropriate chart of accounts. With a little guidance and the right software, this task can be surprisingly easy to complete.

Schedule a FastFund Online Demo: Learn more about our unique software approach to nonprofit accounting, payroll and fundraising.

Bottom Line

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, such as FastFund Accounting, 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.

FAQs

1. What is a Chart of Accounts (COA) and why is it important for my nonprofit organization?

A Chart of Accounts (COA) is a listing of all the accounts that your nonprofit organization uses to record its financial transactions in its general ledger. It’s a cornerstone of your financial management system, helping to streamline financial reporting, ensure regulatory compliance, and effectively track revenue and expenses. A well-structured COA can give you a clear and accurate picture of your organization’s financial health.

2. What does a COA consist of?

A COA consists of a breakdown of assets, liabilities, equity, income, and expenses. Assets may include current assets like cash and accounts receivable, and fixed assets like property and equipment. Liabilities could be accounts payable, accrued expenses, and long-term debt. It also includes an organization’s income and expenses, categorized for easy tracking and reporting.

3. How do I categorize expenses and revenue in my COA?

Expenses and revenue should be categorized based on the nature of your organization’s operations and activities. For example, expenses could be categorized into program services, management and general expenses, and fundraising costs. Revenue could be divided into categories like grants, donations, membership fees, and program service revenue.

4. What role do account numbers play in my COA?

Account numbers in your COA serve as identifiers for specific categories of revenue and expenses. They help to provide a structured and systematic way to track all financial transactions. The use of account numbers can simplify the process of organizing and managing your organization’s finances.

5. What are the benefits of a segmented COA?

A segmented COA allows for greater detail and flexibility in your financial reporting. You can identify funds, functional areas, and individual accounts with ease. This can be particularly beneficial for larger organizations with multiple programs or departments.

6. Any tips for assigning COA account numbers?

When assigning COA account numbers, consistency and logic are key. Choose a numbering system that reflects the structure of your organization. You might want to use different series or ranges of numbers for different types of accounts, such as assets, liabilities, revenue, and expenses.

7. How can I track revenue and expenditures effectively?

Tracking revenue and expenditures effectively is crucial for managing your nonprofit’s finances. A well-structured COA can help you track these by funding source, program, or purpose. This can give you a clearer understanding of how funds are being used and where adjustments may be needed.

8. How can nonprofit fund accounting software like FastFund Online help my organization?

FastFund Online is a nonprofit fund accounting software that can help streamline your financial management process. It can simplify the task of setting up and maintaining your COA, generate compliant financial reports, and provide tools for effective fund tracking and reporting.

9. What is the concept of a unified COA?

A unified COA is a single, comprehensive list of accounts that can be used across your entire organization. It provides consistency and standardization in financial reporting, making it easier to compare and analyze data across different programs or departments.

10. How often should I update my COA?

Your COA should be updated regularly to reflect any changes in your organization’s operations or financial structure. This will ensure that your financial reports are accurate and compliant with regulatory requirements. Regular maintenance of your COA can also help you identify any potential issues or discrepancies in your financial data.

Want to read more? Check out these insightful articles:

• Advantages of Fund Accounting Software for Nonprofits
• Nonprofit Accounting: Guide to Financial Statements Management
• Nonprofit Net Assets and Balance Sheet Explained
• Guide to the Nonprofit Statement of Financial Position Report
• Restricted Donations: Real World Answers on Expenses
• Functional Accounting: Guide to Classifying Expenses

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