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When you have a nonprofit (NPO) to run, keeping up with the accounting process can be overwhelming. How can you quickly gather useful information from large amounts of data to measure the success of your nonprofit? In this post, we’ll explain how to set up and use a nonprofit chart of accounts to manage your organization.
Let’s start with the basics:
A chart of accounts is a list of general ledger accounts grouped by their function in an accounting system. It is an organizational tool that provides a digestible breakdown of all the financial transactions an organization conducted during a specific accounting period, broken down into subcategories.
There are five major categories in a chart of accounts:
Under these five major categories, the organization will set up a series of accounts by function to ensure the key information is disclosed.
For NPOs, a chart of accounts is also a guide that helps nonprofits classify and track revenue and expenses. The account names may differ, but the functions are similar to commercial entities. Every account will usually include an account number, type of account, and name and brief description to help report users locate and understand specific accounts.
Similar to commercial entities, the users of nonprofit financial reports are those who provide resources to nonprofit entities, such as donors, members, creditors, etc. Users of nonprofit financial statements have common needs. They care about the entities’ ability to assess the services they provide and continue to provide, and the method the entities’ managers use to discharge stewardship responsibilities.
The external financial reporting standards for nonprofit organizations are outlined in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). To meet the requirements, NPOs need to disclose the following information:
To understand the specialty of NPOs, we first need to know the characteristics of nonprofit organizations. Generally, nonprofit organizations’ revenues come from contributions and donations. They have natural expenses such as salaries, rent, utilities, etc., which are similar to what for-profit companies keep track of.
However, nonprofit organizations need one more distinction – “functional” expenses. Functional expenses are used to show how natural expenses are incurred for each functional area of a nonprofit. Functional areas typically include programs, management and general, and fundraising. For example, you may have salary expenses for certain employees that relate to programs because those employees’ wages only relate to a program and no other function in the nonprofit.
In QuickBooks, usually, the chart of accounts has natural expenses. QuickBooks also has classes where functional expense categories are created, such as programs, management, general, and fundraising.
Why do nonprofit organizations need this additional step? This comes back to the characteristics of NPOs. The ratio between program expenses to total expenses can easily show the proportion of each program and its expenses. Program expenses are directly related to fulfilling a nonprofit’s mission and result in goods or services being provided. The expenses in the fundraising, management and administration categories relate to raising funds and running the nonprofit.
At the financial year-end, the nonprofits’ financial statements will provide the amount and percentage of each dollar spent in the three functional expense areas. With this classification, users of nonprofits’ financial statements can easily find out how much resources the organization spends on its program(s) and how efficient it is in performing its mission.
In addition, the Form 990 tax return, which most nonprofits have to file, requires you to report the nonprofit’s expenses by programs, management, and general and fundraising categories.
Fortunately, with QuickBooks Online, you can develop your chart of accounts however you like. However, you will need to customize the chart of accounts for a nonprofit. We have included a template that you can upload as a sample nonprofit chart of accounts to use for your organization.
You can see this chart of accounts has account numbers. Certain main categories are in bold, blue fonts and sub-accounts in regular nonbold fonts. For example, you can see account number 3020, board-designated net assets (nonbold) goes under account 3000, unrestricted net assets (bold).
Here is a simple video on how to import the nonprofit chart of accounts into QuickBooks Online:
Since there are few classes to set up for functional categories, here are the classes we suggest creating for your nonprofit.
Here is a video showing how you would use classes in QuickBooks Online to categorize natural expenses relating to their function:
