Setting up your nonprofit chart of accounts from scratch can seem daunting. There’s a lot of planning and organization needed, making it hard to know where to begin.
Here’s the good news: constructing a chart of accounts isn’t all that difficult. And as long as your initial setup is done correctly, your chart of accounts can be pretty simple to maintain.
Now let’s get you started. In this blog, we will dive into what a chart of accounts is, why your organization needs one, and how you can set one up in a way that benefits your organization.
What is a Chart of Accounts?
The point of a chart of accounts (COA) is to organize all your ledger accounts. A COA records all financial activity and ensures your ledger accounts stay in balance and your financial statements are accurate.
Typically, your COA will be divided into five main categories:
Of course, each category comes with its own subcategories, but you must start with these five before you begin to branch off.
Why Do I Need a Nonprofit Chart of Accounts?
Your chart of accounts is the financial heart of your organization—everything flows through it. That includes your accounts payable, your payroll, your receivables, and so on.
Your financial reports pull information from your ledger, making a well-maintained COA necessary to stay compliant on both a state and federal level.
Setting Up A Chart of Accounts
There are just four steps you need to follow when setting up your nonprofit chart of accounts, so let’s start with step one.
Step 1: Create a List of Accounts
The first step toward building an effective COA is to create a list of what your company will need to account for in the future. If you break down the five main categories shown above, you can get an idea of what you’ll need to document.
So, depending on your organization, you might need accounts for insurance, equipment and software expenses, cost of goods sold, payroll taxes, office supplies, and so on.
It’s essential to determine what your organization looks like now, what you expect it to look like five years from now. This will help you think through what will need to be recorded. Of course, in the future, you can add and remove accounts, but it’s important to get most of the structure set up at the start for the most accurate view.
Step 2: Establish a Chart of Accounts
Here are the account types I listed earlier, with the most common breakdown of how they’re numbered.
|1. Assets||1,000 – 1,999||What you own|
|2. Liabilities||2,000 – 2,999||What you owe|
|3. Equity/Net Assets||3,000 – 3,999||What you earn|
|4. Sales||4,000 – 4,999||Total Income|
|5. Expenses||5,000 – 5,999+||Total Losses|
Now, let’s break down this table.
Assets Are What You Own
This is everything from the chair you purchased for your office to the computer you’re working from.
If you happen to own land or patents, this will also be included here. Assets are anything that adds value to your company.
Liabilities Are What You Owe
This is for any debt your organization might have accrued, including any bank loans, mortgages, etc.
Equity/Net Assets is What You Earn
If you take away your organization’s assets and liabilities, whatever is leftover is equity. That may include stocks or retained earnings.
Typically, nonprofits use the term Net Assets rather than Equity.
Sales represents your total income that comes from sales and services.
Expenses Represent Your Total Losses or Expenses
This includes what your nonprofit pays for rent, utilities, payroll, and wages. This is also where recurring software expenses should live.
Step 3: Create Subcategories
The subcategories are made from the list you created for your company’s accounts. Below is an example of how you can organize them.
- 1010 Checking
- 1020 Savings
- 1030 Petty Cash
- 1040 Accounts Receivable
- 1050 Inventory
- 1060 Property
- 1070 Equipment
- 2010 Accounts Payable
- 2020 Sales Tax Payable
- 2030 Income Tax Payable
- 2040 Mortgage Loan
- 2050 Other Loans
- 3010 Dividends
- 3020 Retained Earnings
- 4010 Sales
- 4020 Rental
- 4030 Interest
- 6010 Advertising
- 6020 Computer
- 6030 Labor
- 6040 Stationary
- 6050 Rent for Property
- 6060 Rent for Equipment
- 6070 Travel, Meals, and Entertainment
- 6080 Wages
- 6090 Utilities
Be sure to title your accounts in a way that’s easy to understand.
If you look at Assets, the numbers you use for your accounts can be anywhere between 1,000-1,999, so that gives you the option to set up 999 Asset accounts. Be careful not to make too many accounts for every little thing—this will only make things confusing.
Ideally, you want to keep your records organized the same way for as long as possible.
If you drastically change your COA all the time, you run the risk of complicating your financial data, making it difficult to track your company’s financials from one year to the next.
Step 4: Deleting Accounts
In your chart of accounts, there might be accounts you haven’t used for some time. When you complete your year-end processes, it can be helpful to delete any accounts you haven’t used.
Doing this kind of maintenance will keep your accounts organized and could help reports generate faster.
And Now You’re All Set!
Your nonprofit chart of accounts will begin to build over the years, but you must keep your accounts set to this pattern so you will never have to repeat this process again.
Having your ledger set now gives you the opportunity to see how your organization will grow over the years.
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