The Art of Creating a Nonprofit Chart of Accounts – Part 2 of 2
In our last post, The Art of Creating a Nonprofit Chart of Accounts – Part 1 of 2, we talked about why the chart of accounts is so important. This is true whether you use QuickBooks or any other accounting software. We also gave examples of good and bad uses for accounts.
In this post we will explain how to get started with designing a good chart of accounts for your nonprofit organization. We also list readily available resources that can help you create a framework.
Designing a chart of accounts is an art.
Our purpose is not to provide the specific step-by-step mechanics of creating or editing a chart of accounts. Many good books exist in the marketplace such as QuickBooks 2016: The Missing Manual by Bonnie Biafore which can help you with that part.
Our purpose is to help you understand the art of creating a chart of accounts. How do you create a chart of accounts that truly reflects your unique organization? How do you create a chart of accounts that is concise, yet flexible enough to accommodate reporting for management, 990 and audit purposes?
Most of the answer may already be at hand.
Gather the following documents if you have them. They will give you excellent ideas for the design of your chart of accounts.
- Master operating budget for the overall organization
- Sub budgets by program or grant
- Form 990 or 990-EZ
- Audited financial statements
- Reports filed with state agencies
- Balance sheet and profit & loss reports from your current accounting system
- Manually prepared reports used for management or grant purposes
If you don’t have any of the above documents or if you want further ideas, obtain Form 990 and/or audited financial statements from similar organizations. You can contact organizations directly or download Form 990 at GuideStar.org. Audited financial statements in particular can give you an excellent framework within which to flesh out the detail level accounts you need.
Keep in mind a few guidelines.
1. Create accounts for the balance sheet and the profit & loss report.
The main types of accounts in QuickBooks (or any accounting software) are:
- Balance sheet accounts
- Net assets
- Profit & loss accounts
QuickBooks has other types of accounts, such as cost of goods sold and nonposting accounts. We will not address these accounts for purposes of this post.
QuickBooks subdivides asset and liability accounts into more specific asset and liability account types. Each sub type appears in a specific order on the balance sheet report. Also certain account types have specific functions, such as the bank reconciliation process for bank accounts.
2. Use accounts for natural classifications.
Natural classifications are categories like salaries & wages, travel and office supplies. Accounts in your chart of accounts should reflect natural classifications.
Functional classifications are areas like program, management & general and fundraising. In QuickBooks we use the class list for functional areas. We also like to create a class for special events.
By using accounts for natural classifications and classes for functional areas, you eliminate the need to create redundant accounts for different purposes, such as Postage – Fundraising Gala and Postage – General.
3. Track detail level sources of income using QuickBooks’ items.
You can track different sources of income using items in QuickBooks instead of accounts. For example you can distinguish individual contributions from corporate contributions using items. You can link multiple items to one account for general contributions.
If you charge fees for services you will want an item for each different service. This way you can also create sales receipts or invoices for clients that show the services being charged.
You can greatly cut down on the number of income accounts by using items. Items are also necessary if you want to use sales receipts and invoices in QuickBooks.
4. Group income and expense accounts by parent and sub accounts.
Group income and expense accounts into related sets of accounts consisting of a parent account and sub accounts.
For example, you could create the following account grouping:
- Office Expenses
- Office Supplies
If your chart of account is organized into logical groupings of parent accounts and sub accounts, then you can produce reports in one of two formats:
- Expanded format, where all accounts with balances are shown, or
- Collapsed format, where sub accounts are rolled up into the parent accounts.
The profit and loss report printed in collapsed format is especially nice as a board report since it shows the big picture much better than the detailed expanded report.
5. Take caution if editing the chart of accounts in your existing QuickBooks file.
If you wish to edit an existing chart of accounts, be aware that changes to the chart of accounts will affect the appearance of your reports for all prior periods.
Before you start making changes to your chart of accounts we recommend making a backup of the company file.
Reduce headaches and produce better reports.
Having a well-designed chart of accounts, along with a well-designed class list and item list, makes QuickBooks a joy to use. A good chart of accounts will make all the difference in reducing your QuickBooks headaches and improving your reports!
Follow Up to This Post
Save time on designing your chart of accounts with our recently released product, QuickBooks® to Go! It has the chart of accounts you need, plus a class list and item or product/service list especially designed for nonprofits. It even comes with step-by-step documentation on how to customize the chart of accounts and other lists for your unique organization and how to enter nonprofit transactions. Get on the right track with QuickBooks® to Go!