Creating a Chart of Accounts: Nonprofit Considerations

Thinking of starting a nonprofit? Or has your organization been in existence for years with no clear reporting of the flow of funds? Setting up and effectively using an accounting system is a critical component of every organization, especially nonprofits that are accountable to donors and potential beneficiaries of the organization’s mission.

One of the tasks in setting up an accounting program is to create the chart of accounts. A chart of accounts is a tool that essentially lists every account in the accounting system (the organization’s assets, liabilities, revenue and expenses). Accounting software will offer a standard chart of accounts, but thoughtful planning to address the organization’s specific needs will help save time and headaches in the future. The chart of accounts’ design will determine the efficiency of providing financial statements and can affect the usefulness of the information in making decisions.

Below are some questions to consider when building a chart of accounts:

Organizational Structure

• What does your entity look like now, and what could it look like in the future?
• Is there a potential for more than one entity?
• What programs or services need to be tracked? Be sure to include administration and fundraising.
• How will you set up accounts to easily prepare audit reports and tax returns?
• Do you expect to use government funding?
  • If so, how will you track revenue and expenditures by funding source?

Assets

• Will you have more than one bank account?
  • Add an account for your main operating account, payroll account, any investment accounts and any petty cash fund you plan to have.
• Will you maintain any inventories?
  • Add accounts for inventories you plan to sell and inventories you plan to use.
• Do you have fixed assets?  
  • What’s the threshold you’ll capitalize instead of expense? 
  • Create an account for each asset category that has a different useful life: land, land improvements, building, leasehold improvements, furnishings, equipment, vehicles, etc.
  • Create a contra-account to record accumulated depreciation on each of the asset accounts.

Liabilities

• Who do you owe? 
  • Add individual accounts for accounts payable, lines of credit, mortgage and notes payable.
    • If any of these will have a balance longer than a year, you’ll need to have a short-term account and long-term account for each creditor.
• Are you using the accrual method? Do you plan to pay staff?
  • Add accounts for accrued payroll and accrued payroll taxes. Consider a separate account for each taxing agency.
• Will you offer staff benefits? Will they repay a portion through payroll deductions?
  • Add accounts to house the portion of group benefits you withheld from paychecks. Consider a separate account for each benefit offered.

Net Assets

• Do you plan to maintain the activity within the restricted funds, or will you “release” restricted funds to the unrestricted fund as the restrictions are met?
• Add account groupings to separately track restricted funds from unrestricted funds:
  • Add additional accounts to identify temporary and permanent restricted funds.
  • Add additional accounts to identify funds restricted by time or purpose.

Revenue

• How will your organization be funded/supported?  
  • Donations from the community:
    • Add accounts for individual contributions and corporate contributions.
  • Events: 
    • Add accounts to identify each event, e.g., fall auction, spring gala.
  • Grants:
    • Add accounts to identify major grantors, typically if expected to provide long-term funding or annual renewal.
  • In-kind:
    • Add accounts to track in-kind professional services, in-kind goods and supplies, etc.

Expenses

• What type of costs will be incurred?
  • Add accounts to track employee-related costs, professional services, office expenses, technology, occupancy, travel, insurance, depreciation, interest, etc.
  • Add an expense account to match each in-kind income account.
• What type of philanthropy does your mission support?
  • Add accounts to track assistance to organizations, individuals, affiliates, etc.
• Do you need to be able to quickly identify compensation by level, type, direct or indirect?  
  • Consider adding an account for each segment you want to track.

These are just some examples of the customization options available, and no two organizations will have the same needs. The best rule of thumb is to create accounts that will help you track items that funders, government compliance agencies and tax reporting agencies will need to identify. While it’s possible to have too much information, nonprofits should strive to provide transparency with clear and organized accounting practices.

If you have any questions, contact your BKD Trusted Advisor^™ or fill out the Contact Us form below. Need help with your accounting operations? Consider our outsourced accounting services.