Nonprofit accounting can seem overwhelming—but it doesn’t have to be!
In this guide, we are going to explain the nonprofit Chart of Accounts. We will go over its importance, key components, benefits, and more so that you can feel prepared to create a Chart of Accounts at your own organization.
We’ll also address common challenges faced in managing the Chart of Accounts and offer practical solutions to overcome them. Let’s dive in!
What Is a Chart of Accounts (COA)?
Even though they aren’t for-profit businesses, nonprofits still have to keep detailed track of their finances.
Nonprofits generate revenue from many different sources, such as grants, donations, corporate sponsorships, and more. They also have many expenses, whether they be program expenses, operational expenses, or even fundraising expenses.
Understanding how all of these financial components work together to advance the organization’s mission is essential for nonprofit success—and this is where the Chart of Accounts comes in.
Defining the "Nonprofit Chart of Accounts"
A nonprofit Chart of Accounts (COA) is a list of all an organization’s financial accounts and their corresponding codes.
In essence, the Chart of Accounts helps provide a picture of how money moves within your organization by listing accounts that fall within the following categories:
We will go into these categories and their subcategories later on in this article, but for now it’s important to understand that a nonprofit Chart of Accounts is a living document that helps facilitate accurate and clear financial reporting.
Who Creates the COA?
The COA is usually created by the nonprofit's financial team or an external financial consultant. With the COA in place, anyone in the organization can quickly see how money moves in and out of the organization.
It also allows nonprofit staff to assign expenses to the correct code within the chart (more on these specific codes below). This makes it very easy to track and report on specific projects and activities, including demonstrating financial separation between projects.
A nonprofit chart of accounts is crucial for maintaining accurate financial records and ensuring transparency in the financial management of an organization. It also considers the specific reporting requirements imposed by regulatory bodies or funders.
By implementing a well-defined Nonprofit Chart of Accounts, organizations can streamline their bookkeeping system and demonstrate accountability to stakeholders such as donors, board members, regulators, and the general public.
The Importance of a Structured Bookkeeping System for Nonprofits
A structured bookkeeping system is crucial for nonprofits to effectively manage their financial records and ensure transparency and accountability.
Nonprofit organizations, like any other business entity, need to maintain accurate and organized financial information to meet legal requirements, make informed decisions, and demonstrate fiscal responsibility to donors and stakeholders.
By maintaining a comprehensive bookkeeping system, nonprofits can track income from various sources such as fundraising events, grants, membership fees, as well as in-kind donations.
They can also record expenses related to program delivery, administrative costs, fundraising efforts, or any other operational expenditures. This level of detail enables nonprofits to monitor their financial health effectively and make informed decisions to maximize the positive impact of their work.
Also, donors want to know that nonprofits have the ability to manage their funds effectively, and the transparency of regular reporting helps establish this credibility.
If you’re new to nonprofit bookkeeping, our budget templates are an excellent place to start when developing an accounts structure.
The Unique Nature of Nonprofit Accounting
Though similar in some ways, nonprofit and for-profit organizations have different accounting practices. Understanding these differences is crucial for accurate financial reporting and compliance.
How Nonprofit Accounting Differs from For-Profit Entities
One of the main differences between for-profit and nonprofit accounting is that for-profits need to focus on accounting to make sure they are actually making a profit.
On the flip side, since they aren’t designed to generate profit, nonprofits are more focused on accounting to maintain financial transparency and their 501c3 status.
While for-profit companies leverage accounting insights to maximize profit, nonprofits leverage their accounting insights to maximize their impacts.
Nonprofits and for-profits also generate revenue differently, so they often require different functionality for bank accounts.
Finally, nonprofit accounting follows a different accounting framework specifically designed for nonprofits, so the auditing process for nonprofits is also different in various ways. This framework focuses on accountability and transparency, ensuring that funds are used in accordance with the organization's purpose and that financial reporting accurately reflects the organization's activities.
The Role of Donations, Grants, and Restricted Funds
In the world of nonprofit accounting, donations, grants, and restricted funds play a crucial role.
Nonprofit organizations rely heavily on these financial resources to support their programs and advance their missions. Understanding how to properly account for these funds is essential for maintaining transparency and ensuring compliance with accounting standards.
Here’s a quick overview:
Donations: These are funds gifted as a one-off or recurring payment without specific reporting requirements. Donors fund nonprofits because they believe that they will use the money well, to deliver on their mission.
Grants: These are funds awarded after completing and winning a funding application. The funder selects the winning proposals and stipulates reporting requirements and a timeline.
Restricted funds: These are funds—whether from donations or grants—that are restricted for a specific purpose. For example, a grant may specify that its funds can only be used for a specific project—not to cover operational expenses.
For more insight into how to secure donations and win grants, check out Instrumentl’s blog.
Click to find the best grants for your nonprofit from 12,000+ active opportunities.
The core components of a nonprofit chart of accounts typically include various categories and subcategories that capture different aspects of financial operations.
These may include revenue sources, such as donations, grants, or program fees, as well as expense categories like salaries, program expenses, fundraising costs, and administrative overhead. The main account categories are organized under the following headings:
Net Assets (3000-3999)
Organizations often structure their chart of accounts in a hierarchical manner to provide a comprehensive view of their financial position.
This hierarchy allows for easy navigation and analysis by grouping similar accounts together. For example, revenue accounts can be organized by funding source or type (individual donations, corporate grants), while expense accounts can be grouped by program area or functional category (education programs, marketing expenses).
Assets (1000 to 1999)
One of the core components of the nonprofit Chart of Accounts is assets, which are typically categorized under account numbers ranging from 1000 to 1999. Assets represent the resources owned by the organization, such as cash, investments, property, and equipment. Tracking and managing these assets is crucial for financial planning and decision-making.
For example, assets codes might be something like:
1100 - Checking
1200 - Savings
1300 - Investments
1400 - Accounts Receivable
Liabilities (2000 to 2999)
Liabilities represent obligations or debts owed by the organization to external parties. Examples include loans, accounts payable, and accrued expenses. Properly categorizing liabilities allows nonprofits to have a clear understanding of their financial obligations and manage them effectively.
For example, liabilities codes might be something like:
2100 - Accounts Payable
2200 - Accrued Salaries
2300 - Accrued Employee Benefits
2400 - Accrued Payroll Taxes
2500 - Accrued Property Taxes
2600 - Unearned/Deferred Revenue
2700 - Short-Term Notes & Loans Payable
2800 - Line of Credit
2900 - Government-Owned Fixed Liabilities
Net Assets (3000 to 3999)
Net assets play a significant role in understanding the overall financial health of a nonprofit organization. They are categorized under account numbers ranging from 3000 to 3999.
Net assets represent the difference between total assets and total liabilities and can be further classified into unrestricted net assets (available for general use), temporarily restricted net assets (restricted by donor-imposed conditions), or permanently restricted net assets (restricted by donor stipulations).
For example, Net Assets codes might be something like:
3100 - Unrestricted Net Assets
3200 - Temporarily Restricted Net Assets
3300 - Permanently Restricted Net Assets
Income (4000 to 4999)
Income is another key component in the nonprofit Chart of Accounts and falls within account numbers ranging from 4000 to 4999. This category includes all sources of revenue generated by the organization through donations, grants, fundraising events, program fees, or other sources.
For example, Income codes might be something like:
4100 - Individual Contributions
4150 - Corporate Contributions
4200 - Legacies and Bequests
4250 - Federal Grants
4300 - State Grants
4350 - Local Government Grants
4400 - In Kind Contributions
4500 - Program Service Fees
4550 - Membership Dues
4600 - Investment Revenue
4700 - Event Sponsorships
Expenses (5000 to 5999)
Expenses encompass all costs incurred by a nonprofit organization in carrying out its mission and are categorized under account numbers ranging from 5000 to 5999.
This includes program expenses directly related to delivering services or programs as well as administrative expenses necessary for running day-to-day operations, such as renting a hall to host an event, paying travel expenses, or purchasing stationery.
For example, Expenses codes might be something like:
5100 - Salaries and Payroll
5150 - Payroll Taxes
5200 - Health Insurance
5250 - Retirement Benefits
5300 - Depreciation Expense
5350 - Contract Services
5400 - Office Supplies
5450 - Rent
5500 - Utilities
5550 - Real Estate Taxes
5600 - Equipment Purchase and Maintenance
5650 - Travel
5700 - Fundraising Expenses
5750 - Marketing and Promotion
5800 - Fixed Asset Purchases
5900 - Payment to Affiliates
Benefits of an Effective Nonprofit Chart of Accounts
A well-structured Chart of Accounts is essential for nonprofit organizations to effectively manage their finances. Below are a few of the different ways a nonprofit Chart of Accounts can benefit your organization.
Enhancing Financial Transparency
By categorizing income and expenses into specific accounts, nonprofits can easily track and report on their financial activities.
This promotes transparency and accountability, allowing stakeholders such as donors, board members, and regulatory bodies to have a clear understanding of how funds are being utilized. With such transparency, supporters can be confident in promoting the nonprofit's activities.
Streamlining Financial Reporting and Audits
With a properly organized Chart of Accounts, accurate financial reports can be easily generated or accessed by funders or any member of staff. This can reduce common bottlenecks within your organization’s financial department.
Additionally, during audits, having a well-structured chart of accounts simplifies the process by providing clear visibility into financial transactions.
Assisting in Strategic Decision-making and Budgeting
A well-maintained Chart of Accounts allows nonprofit organizations to analyze income and expenses across different categories, making it easier to identify areas where resources can be allocated more effectively.
This aids in creating realistic budgets aligned with the organization's goals and objectives.
Common Challenges and Solutions
Nonprofits face several challenges when it comes to managing and utilizing their Chart of Accounts. We have listed some of the most common obstacles below, as well as ways to overcome them.
Navigating Complex Fund Tracking
One significant challenge is navigating complex fund tracking within the Chart of Accounts. Nonprofits often have multiple funding sources and need to accurately track how funds are allocated and spent across various programs or projects. This can be challenging as it requires a comprehensive understanding of the organization's financial structure and the ability to keep track of expenses accurately.
A range of accounting software designed specifically for nonprofits is available, but it’s worth doing research to find the most suitable tool for your organization.
Addressing Misconceptions About the "Overhead Myth"
Another difficulty that nonprofits face is addressing misconceptions about the "overhead myth."
There is a common misconception that overhead costs are not valuable investments in a nonprofit's mission. However, this mindset overlooks crucial operational expenses necessary for effective and sustained program delivery. Nonprofits need to educate stakeholders about the importance of allocating funds properly to cover both programmatic expenses and necessary overhead costs.
Streamlining Data Entry and Ensuring Accuracy
Streamlining data entry and ensuring accuracy is another area where nonprofits often encounter challenges.
With numerous different accounts, it can be difficult to keep track of everything. Nonprofits should consider implementing a streamlined bookkeeping system that automates data entry processes, reduces human error, and ensures accurate financial reporting.
As you can see, a Chart of Accounts is a crucial piece of the nonprofit accounting puzzle.
It provides clarity, makes reporting easy, and encourages financial accountability.
By maintaining transparent and well-documented financial records through proper bookkeeping practices, nonprofit organizations can build trust among stakeholders while fulfilling their missions effectively.
For more nonprofit accounting guides, best practices, and tips, check out Instrumentl’s blog.
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