Nonprofit Considerations When Creating a Chart of Accounts
- Dana M. Alexander
Setting up and executing an accounting system is critical for any organization. But the accounting processes of nonprofit organizations are of particular importance because they determine whether the nonprofit can succeed in the mission they’ve embarked upon, with goals that are more altruistic than those based on profitability and revenue generation.
The ultimate role of accounting in a nonprofit is to reinvest all potential funds into their organization and mission. As such, it’s key that nonprofits allocate their expenses according to the various requirements and restrictions their donors and contributors set forth, meaning several systems and reports unique to the sector must be designed to keep finances well organized. Among the first and most essential tasks in setting up an accounting program is to create a chart of accounts.
What Is a Nonprofit Chart of Accounts?
A chart of accounts is the backbone of all accounting procedures. It is a tool that lists every account in an accounting system, including the organization’s assets, liabilities, net assets, revenues, and expenses. While most accounting software will offer a standard chart of accounts, it’s important that careful planning be used to address the organization’s specific needs, saving time and potential future headaches.
The chart of accounts is instrumental in determining the organization’s efficiency and providing financial statements that can generate information that is useful in making decisions. The five main categories within a chart of accounts are:
Creating a nonprofit chart of accounts will look like a long ledger organized by designated numbers and sections. Each organization must adjust these designations according to its specific programs and financial information.
Why Setting up a Nonprofit Chart of Accounts Is Important
A nonprofit chart of accounts operates as an ample filing cabinet, providing documentation of all accounting ledgers and information about investments, payroll, programming, and utilities. The nonprofit chart of accounts is an invaluable organizational structure for the nonprofit, serving as the basis from which all other reports, including the statement of financial position, statement of activities, statement of functional expenses, and statement of cash flows, will be sourced. Maintaining a well-organized chart of accounts makes creating these other reports and statements more manageable.
Questions to Ask When Setting up Your Chart of Accounts?
When building a chart of accounts, important questions should be asked about these categories, such as:
While no two organizations will have the exact same needs, creating accounts that will help you track items your funders, government compliance agencies, and tax reporting agencies need to identify is important. Nonprofits should strive to provide transparency with their finances, ensuring clear and organized accounting practices.
Contact your CRI advisor for any questions about considerations when creating a chart of accounts. Our team of accounting experts is prepared with the answers you need to make educated decisions and equip your nonprofit for future success.
Subscribe to our e-communications to receive the latest accounting and advisory news and updates impacting you and your business.