Back to Basics: How to Set Up Your Nonprofit Chart of Accounts

Introducing the Chart of Accounts (COA)

Are you ready to nerd out on nonprofit accounting?

Introducing the Chart of Accounts (COA) - the foundational accounting tool every nonprofit leader needs to get right for maximum financial insight and awareness. It’s a critical element to your financial operations.

A clean chart of accounts promotes organizational sustainability and high performance.

Accurate data empowers organizations to:

• Have meaningful financial conversations

• Eliminate uncertainty as to financial positions

• Guide decision making

• Provide clarity on organizational health

• Generate data for grant applications

• Build a financial case for fundraising initiatives

• Encourage financial transparency (donors respond well to transparency)

• And so much more…

 When our team brings on a new client, we review their chart of accounts right away and provide recommendations for improvement as needed. It’s just that important.

So, let’s dive in and learn a bit more!

What is a Chart of Accounts?

A chart of accounts (COA) is a standard accounting index system that helps nonprofit organizations classify and track their financial activity. It’s the backbone of the financial data that populates other financial reports. The COA organizes transactions into digestible information that gives nonprofit leaders a clear view of their organization’s financial status. For nonprofits, the chart of accounts is typically broken down into five sections: assets, liabilities, equity, income, and expenses.

• ASSETS [WHAT YOU OWN]: cash, inventory, fixed assets, accounts receivable, prepaid expenses, investments

• LIABILITIES [WHAT YOU OWE]: accounts payable, short or long-term debt, payroll taxes, deferred revenue

• EQUITY [WHAT YOU’RE WORTH]: retained earnings, unrestricted assets, temporarily or permanently restricted net assets

• INCOME [WHAT YOU RECEIVE]: contributions, pledges, grants, revenue, investment income

• EXPENSES [WHAT YOU SPEND]: office supplies, salaries, printing costs, bills, rent, purchase orders

Keep in mind that the list above is not exclusive. If you’d like to see the all-encompassing chart of accounts, refer to the Unified Chart of Accounts (UCOA). This was designed for nonprofits with every possible account included, and it mirrors categories on the IRS Form 990.
 
Do we recommend copying the UCOA? Nope! It makes more sense to design your chart of accounts to reflect your organization's exact needs. Keep it as clean and simple as possible. 

How to Set up your Nonprofit Chart of Accounts

Put on your logical thinking hat, step number one!

As we mentioned above, there are five recommended categories for a nonprofit's chart of accounts: assets, liabilities, equity, income, and expense. Each category should be assigned a specific number sequence to conform to best practice. 

Here’s a standard chart of accounts numbering designation for nonprofits:

Assets – 1000
Liabilities – 2000
Equity – 3000
Income – 4000
Expense – 5000+

These numbers will serve as the headers for your chart of accounts. Individual accounts will be broken down and classified within each category using corresponding number sequencing. For example, the accounts within the income category might have subcategories like this:

Individual/Small Business Contributions – 4010
Corporate Contributions – 4020
Legacy and Bequests – 4070
Uncollected Pledges – Estimated - 4075
Foundation/Trust Grants - 4230
Federal Grants - 4520

This is a basic example. The standard chart of accounts we start with at Blue Fox contains just over 100 line items and includes sub headers to group similar accounts.

We encourage nonprofits to keep their COA simple (we call it “natural”) while still segmenting data enough that it delivers meaningful information for future decision-making.

Here is some other Blue Fox chart of account best practices for nonprofits:

• As shown above, always number your accounts (not everyone does this)

  • Why? Because software like QuickBooks tends to organize reports based on alphabetical account names if there are no account numbers in use. This can be a more confusing, or at least, less meaningful way to organize the data.

• Header accounts should never have a balance in reports

• Special events should have their own section for both revenue and expenses for nonprofits

• Account titles should be as unique as possible

• Generally, accounts should line up to the income and expenses as listed on the 990

• Keep in mind that the COA ultimately must work for management

• Note of caution: if you're leaning too much toward what people want to see, your COA may not be natural, and you run the risk of not fully leveraging other tools in QuickBooks for additional dimensionality

  • Example: if the board wants to see subaccounts under Salaries & Wages on the P&L that show everyone’s individual pay, that is not the correct approach. Over time and with staff turnover, you could easily have dozens and dozens of subaccounts which make reports excessively long and complicated

• If you choose to revise your COA, be sure to create a roadmap of sorts for your tax/audit team so that they understand the changes you’ve made and why

If you have any questions about revamping your nonprofit’s chart of accounts, our friendly team is happy to help!
​Give us a shout, and we'll get you sorted.