Nonprofit Chart of Accounts: A Rundown for Your Organization

Monday, August 1, 2022

Nonprofit organizations take a unique approach to their accounting systems. This is because they must segment their funds, allocate them appropriately and according to specific restrictions, and reinvest all profits back into the organization’s mission. This makes it imperative for them to find sustainable revenue streams to support the nonprofit and to maintain a sustainable system of recording their financial transactions.

The tool that nonprofits can use to segment their funds and make reporting on their financial practices is called the chart of accounts (COA). The nonprofit chart of accounts helps organizations effectively organize their revenue and expenses into specific categories, effectively segmenting money into the funds necessary to manage a system based on fund accounting.

In this guide, we’ll go over the nonprofit chart of accounts, how it organizes funds, and why it’s an important tool for nonprofit organizations. This resource can be the backbone of effective nonprofit accounting practices when used properly. Without further ado, let’s dive into the definition of a nonprofit chart of accounts.

What is the nonprofit chart of accounts?

The nonprofit chart of accounts is a systematic numbering system that categorizes your nonprofit’s transactions, breaking down your revenue and expenses into further categories necessary for fund accounting.

Essentially, your chart of accounts helps organize the key financial data your nonprofit has about your finances so it can be further used to compile other financial reports and statements that provide financial insight for your organization.

When you pull financial reports, the data will come from your chart of accounts. Some of these key reports will include your:

  • Statement of activities. The statement of activities is used to help nonprofits categorize revenue versus expenses. It shows a breakdown of the organization’s transactions, helping the organization understand how each activity affects its mission as a whole. This statement is parallel to a for-profit’s income statement.
  • Statement of financial position. The statement of financial position is used to help nonprofit organizations get a snapshot view of their organization’s overall financial health. It outlines the nonprofit’s assets, liabilities, and net assets. This statement is the nonprofit equivalent of the for-profit balance sheet.
  • Statement of cash flows. The statement of cash flows helps nonprofit organizations understand how cash flows in and out of the organization on a regular basis. It shows how cash moves as a part of your organization’s operating, investing, and financing activities.

Your accounting team can also review your nonprofit chart of accounts when preparing your budget for the coming year. It provides a detailed view of your funds entering your system as well as your expenses, helping estimate a more accurate financial plan that will support your organization’s mission.

What are the components of a chart of accounts?

As we mentioned before, your nonprofit chart of accounts provides a numeral system for organizing your financial information. This financial information is broken down into five main categories — assets, liabilities, net assets, income, and expenses.

Most nonprofit organizations use the same numbering system to organize this information, providing a different thousands number for each main category:

  • 1000 - Assets: Your assets describe what your organization owns, such as your property value, checking, savings, equipment, cash on hand, accounts receivable, and more.
  • 2000 - Liabilities: Your liabilities describe what your nonprofit owes, such as your accounts payable, salaries, employee benefits, payroll taxes, property taxes, loans, and credit.
  • 3000 - Net Assets: Your net assets describe what your organization is worth, calculated by subtracting your liabilities from your assets. In your chart of accounts, you’ll list your unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets.
  • 4000/5000/6000 - Income: Your income may fall under a range of different numbers in your chart of accounts, and can be broken down further (4000 may describe your contributions, 5000 earned contributions, and 6000 other revenue). For example, some items that would fall under this category include your individual contributions, state and federal grants, and service fees.
  • 7000/8000/9000 - Expenses: Like your nonprofit’s income, your expenses may also take up several numbered categories in your chart of accounts and can also be broken down further (7000 may describe personnel expenses, 8000 non-personnel expenses, and 9000 non-GAAP expenses). Some items that may fall under this category include your salaries and payroll, health insurance, office supplies, travel expenses, and the purchase of fixed assets.

Under each of these categories falls sub-categories that will more specifically outline your organization’s finances. Consider, for example, if you receive a major donation from a dedicated supporter and that gift is restricted to supporting your nonprofit’s scholarship program. This contribution will be added to your individual contribution subcategory under your income COA category. It will also result in the adjustment of your restricted net assets category.

As you establish your nonprofit chart of accounts, be sure to leave some space between your categories and subcategories. This allows future accounts to be made and placed where they’re most appropriate within the chart.

What does a chart of accounts look like?

Generally, your nonprofit chart of accounts looks more or less like a list of numbers associated with different types of transactions and financial information. Jitasa’s chart of accounts guide provides the following example of what one might look like:

After you’ve established your chart of accounts, you’ll need to maintain it and ensure it doesn’t become disorganized or dirty. NPOInfo’s guide to data hygiene explains that data is key to many operations, but it “fails to hold any value if you’re unable to identify your data when you need it. Without taking the necessary steps to keep your data up-to-date, clean, clear, and concise, it is virtually useless.” Charityproud makes it easy for you to keep your data accurate and clean. Donations are organized by restrictions, campaigns, and funds to help clearly track your cash flow. Our robust reporting module is also a great tool for extracting and analyzing data from your system.

Therefore, to keep the data held in your nonprofit chart of accounts as clean and tidy as possible, your nonprofit should make sure to:

  • Keep your accounts somewhat general, only getting as specific as you need them to be for detailed reports. Accounts that are too specific can be more challenging to manage and locate on a regular basis.
  • Delete unused accounts from your chart of accounts to keep them as organized as possible over time. You can always add them back in later if you need them!
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  • Ask an accountant to review your chart of accounts and to review the setup to be sure you’re not missing anything important or failing to record essential information.

Upkeep is essential for proper data hygiene no matter what software or database you’re working in. When so many of your key financial reports are pulled from your nonprofit chart of accounts, you’ll want to make sure your data is as accurate and organized as possible. .

Many nonprofit organizations choose to use the unified nonprofit chart of accounts, a templated chart of accounts for nonprofit organizations. However, this COA had to cover all of the basis for all organizations, making it incredibly detailed and extensive. While this works well for larger organizations, smaller organizations may prefer toning down this document or establishing their own smaller chart.

As we’ve covered in this guide, your nonprofit chart of accounts is a key resource for nonprofits to use to organize their finances. It’s important to establish one that will work best for your organization and will allow your accounting team to keep track of key financial data.