Nonprofit Chart of Accounts: What It Is and Why It Matters

Nonprofit Chart of Accounts: What It Is and Why It Matters

By Jon Osterburg, Chief Operating Officer of Jitasa

by Ro

Nonprofit Chart of Accounts: What It Is and Why It Matters

By Jon Osterburg, Chief Operating Officer of Jitasa

by Ro

by Ro

For nonprofits like yours, furthering your mission is your top priority.

In many cases, this means that most of your day-to-day efforts are dedicated to fundraising, engaging supporters, and running your programs. Nonprofit financial management and accounting often end up taking a backseat, even though they’re critical to your organization’s success and all of your activities.

The central document you’ll rely on for managing your nonprofit’s financial information is your chart of accounts. This essential resource compiles information from all of your ledgers to provide a comprehensive overview of your organization’s financial activities.

In this guide, we’ll cover the basics of creating and applying a nonprofit chart of accounts by answering the following questions:

          • What Is a Nonprofit Chart of Accounts?
          • What Information Does a Nonprofit Chart of Accounts Include?
          • Why Does the Chart of Accounts Matter?

Because the nonprofit chart of accounts is so comprehensive, putting it together can seem daunting at first. Fortunately, you don’t have to do this work on your own! Consider working with a nonprofit accountant who can evaluate your organization’s unique situation and develop a chart of accounts that encompasses your needs, so you can spend less time categorizing your finances and more time focusing on your mission.

Let’s dive in!

What Is a Nonprofit Chart of Accounts?

According to Jitasa’s guide to the nonprofit chart of accounts, your Nonprofit Chart of Accounts “provides a list format of all of the accounts and ledgers at your organization, providing information about your checking account, investments, payroll, programming, utilities, and more.”

Accounting is based on the reports and statements that organizations use to track their finances. The chart of accounts lists all of the accounts and ledgers your nonprofit accountant consults to compile these statements and track all financial transactions. 

Although your nonprofit doesn’t pay taxes or work to maximize your profits—two major areas of focus in for-profit accounting—your chart of accounts is essential to the primary purpose of nonprofit accounting: keeping your organization accountable to donors and other stakeholders.

What Information Does a Nonprofit Chart of Accounts Include?

To get started with creating your nonprofit’s chart of accounts, there is a standardized template you could use known as the Unified Chart of Accounts (UCOA). This template organizes your transactions similarly to your annual Form 990 so that information transfers easily between the two documents. 

However, the UCOA tends to be more complicated than is necessary for most small to mid-sized organizations. In these cases, it’s more effective to develop a chart that is customized to your nonprofit’s specific accounts by organizing your financial activities into five categories:

          • Assets: everything your nonprofit owns, including cash, investments, and property.
          • Liabilities: anything your nonprofit owes, such as accounts payable, loans, and lines of credit.
          • Net assets: the total amount your organization is worth, calculated by subtracting your liabilities from your assets.
          • Income: all of the revenue you bring in from individual donations, grants, sponsorships, and other funding sources.
          • Expenses: all of the money your organization spends on office space, marketing, event planning, staff compensation, and other costs.

To keep your chart of accounts organized, each account within these categories is designated with a specific number. Generally, numbers beginning with 1000 denote assets, 2000 is for liabilities, 3000 covers net assets, 4000 to 6000 mark different subcategories of income, and 7000 to 9000 represent various types of expenses. When you put all of these elements together, you’ll get a chart of accounts that looks something like this:

Why Does the Chart of Accounts Matter?

Essentially, the chart of accounts is the foundation of effective nonprofit financial management and reporting. There are a variety of activities that your chart of accounts can inform, but we’ll look at two in more detail: compiling financial statements and preparing for audits.

1. Compiling Financial Statements

Your organization likely collects many types of financial data, from the revenue earned during each of your fundraising events to the program expenses that support your mission. According to NPOInfo, this type of financial data is essential for not only keeping your accounts organized, but also maintaining financial stability and strategizing for the future.

This information is saved in its raw form in your chart of accounts. However, for the data to be applicable to your nonprofit’s strategy, it needs to be organized into readable statements that you can draw conclusions from. 

Nonprofits typically compile the following four types of financial statements:

          • Statement of activities. The nonprofit equivalent of the for-profit income statement, this document categorizes an organization’s revenue and expenses, taking into account any restrictions placed on funding.
          • Statement of financial position. Sometimes called a balance sheet, this statement reports on a nonprofit’s assets and liabilities to create a snapshot of the organization’s financial health and ability to take risks.
          • Statement of cash flows. This document shows how cash moves in and out of an organization, providing insight into the nonprofit’s spending habits and fundraising success.
          • Statement of functional expenses. Not all nonprofits compile this statement, but those that do use it to organize revenue and expenses in a format that makes filling out the IRS Form 990 more convenient come tax season.

Your nonprofit chart of accounts compiles all of the information that is used to create each of these statements. The statement of financial position relies on knowing your organization’s assets, liabilities, and net assets, while the rest require analysis of your income and expenses. When you have a single document that tells you where you can find all of this information, compiling all of these financial statements becomes much easier.

2. Preparing for Audits

For many people, the word “audit” immediately instills fear as they imagine the IRS digging through their tax returns looking for potential fraud. But because nonprofits usually don’t pay taxes, nonprofit financial audits are conducted by independent auditors usually for the purposes of increasing transparency with stakeholders and finding opportunities to improve their accounting procedures.

Some nonprofits choose to undergo audits simply to learn how best to make changes to their financial management system. Others are required to conduct them because regular audits are part of their bylaws or because an audit is required to receive certain types of funding. Either way, before an audit, your organization will need to prepare extensively by:

          • Reconciling all bank accounts.
          • Reviewing uncleared transactions.
          • Reviewing your nonprofit’s vendors. 
          • Reviewing customers’ or members’ payments. 
          • Reviewing undeposited funds. 
          • Looking for coding errors. 
          • Reviewing your capitalization. 
          • Reviewing your account balances. 
          • Reviewing your accounts receivable and payable. 

As you go through all of this data, it’s helpful to have a guide that will help you to find records on your assets, liabilities, net assets, income, and expenses — which is where your chart of accounts comes into play. For instance, if you’re reviewing your vendors, you can find a breakdown of your credits and accounts payable in the liabilities section. Or, if you’re reconciling your bank accounts, you can reference your chart of accounts to ensure you’ve reviewed them all.

Why I Am Writing About This

Your nonprofit chart of accounts is not only the central document for organizing accounting data, but also a major source of information for compiling financial statements and preparing for audits, among other activities. Understanding this resource and its applications will help your nonprofit better manage your finances so you can succeed in fundraising, strategic planning, and running programs that further your mission.

About The Author

Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not for profit organizations.

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