Chart of Accounts for Nonprofits: Guide to Proper Setup

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. Learn how to segregate funds the easy way for tracking revenue 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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How to create a nonprofit chart of accounts

Assign COA Account Numbers

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.

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.

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.

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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 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.

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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