Chart of Accounts Numbering System: A How-To Guide for Non-Profits
Are you a member of a non-profit organization looking to improve your financial management? If so, understanding the chart of accounts numbering system is incredibly important.
This how-to guide will walk you through setting up and using an effective chart of accounts specifically tailored for non-profits.
In this article, we will cover the following topics:
What is a chart of accounts and why is it important for your organization's financial tracking?
The three key steps for properly numbering your chart of accounts.
Valuable tips on effectively utilizing your chart of accounts to streamline reporting and analysis processes.
An example of a chart of accounts numbering system.
How to use pre-existing templates to save time and effort.
By the end, you'll have all the knowledge necessary to implement a well-structured chart of accounts that meets the unique needs of your non-profit organization.
What is a Chart of Accounts or COA?
So, you're probably wondering, what exactly is a chart of accounts?
Well, it's like the backbone of your nonprofit's financial ledger, providing a systematic way to categorize and reference all your different accounts.
The importance of accurate account coding (numbering) cannot be overstated. It ensures that each transaction is properly recorded and classified, allowing for better financial analysis and decision-making.
A well-organized chart of accounts brings numerous benefits. It allows for easier tracking and monitoring of expenses, assets, liabilities, and equity. It also facilitates accurate financial reporting and ensures compliance with regulatory standards.
However, maintaining a chart of accounts can pose challenges in terms of consistency and accuracy across different departments or branches within an organization. Integration with accounting software is crucial to streamline data entry processes and automate calculations.
Ultimately, the chart of accounts plays a vital role in generating meaningful financial reports that provide insights into the nonprofit's performance and help drive strategic decisions.
3 Steps for Numbering a Chart of Accounts
To number a chart of accounts, start by determining the types of accounts your nonprofit has. This will help you categorize and organize them effectively.
Next, decide on the codes you want to use for each account, ensuring they're clear and logical.
Finally, select a numbering system that aligns with your nonprofit's needs and preferences.
1. Determine Which Types of Accounts the Nonprofit has
First, take a moment to identify the various types of accounts your organization has. This step is important as it lays the foundation for creating an organized and efficient chart of accounts.
By determining account types, you will be able to analyze financial transactions effectively, track expense categories, identify revenue sources, and evaluate asset management.
Here are three sub-lists that will help you in this process:
1. Assets
Determine the different types of assets your company owns, such as cash, inventory, equipment, or property.
Evaluate their current value and categorize them accordingly.
Consider any intangible assets like patents or trademarks.
2. Liabilities:
Identify all outstanding debts and obligations your company owes.
Classify liabilities based on their nature, such as loans payable or accounts payable.
Ensure accurate tracking of interest payments and repayment schedules.
3. Net Assets
Equity or Net Assets is the result of subtracting total Assets from total Liabilities.
Nonprofit's Equity is divided between Net Assets With Donor Restrictions and Net Assets Without Donor Restrictions.
4. Revenue
Analyze the various sources of income for your organization.
Categorize revenue streams based on their origin or type (e.g., grant revenue, contribution revenue, fundraising revenue, and sponsorship revenue).
Consider any non-operating income or one-time gains.
5. Expenses
Use 4 primary accounts to categorize your expenses: Programs, administrative, fundraising, and payroll.
For any repeating accounts you will distinguish them based on the class feature in QuickBooks. For example, marketing expense may be used in both programs and fundraising, which can be categorized by class, but will all fall under the same account in the Statement of Activity.
2. Select Codes for your Organization
When deciding on your codes, it is important to imagine yourself as a financial manager organizing the various departments and account types within your organization. This will help you create an efficient and organized system. Determining the right codes is crucial for maintaining clarity and accuracy in your chart of accounts.
Account numbers typically contain 2 distinct codes. They are categorized as follows:
Account Code: This code is typically a four digit code that differentiates the accounts. Below the numbering system is explained in further detail. These are identified as the chart of accounts.
Department Code: The department code is typically a two or three digit code that differentiates the departments within your organization. For example it might identify the programs within your organization. It is helpful as reports can be generated for managers based on their department. These are identified as classes in QuickBooks Online.
By organizing your codes in a logical and meaningful way, you can ensure that your chart of accounts is an effective tool for managing your company's finances.
3. Select a Numbering System
You must choose a numbering system for each separate account to be able to quickly identify them.
When it comes to numbering systems, the simpler, the better.
For example, you may consider to number your organization's assets from 1000 to 1900, with each different asset type falling within that range. You may then consider numbering your nonprofit's liabilities from 2000 to 2900, following a similar idea as the assets.
To ensure effective implementation, consider some best practices such as using meaningful digits, maintaining a consistent structure, and regularly reviewing and updating the numbering system based on changing organizational needs. Additionally, be cautious to avoid common mistakes like using too many or too few digits or failing to document any changes made to the numbering system.
Tips on Using a Chart of Accounts
When using a chart of accounts, it's important to consider the principles of managerial accounting. This will help you track and analyze financial information effectively.
Understanding indirect costs and allocating them to appropriate accounts can provide a clearer picture of your organization's financial health.
Creating separate accounts for important entries such as revenue streams or major expenses allows for easier tracking and analysis of specific areas.
Implementing Managerial Accounting
Consider using managerial accounting to help smaller organizations categorize and structure their financial data. This makes it easier to track expenses as the nonprofit grows and expands.
Utilize techniques like cost allocation methods and budgeting and forecasting strategies to gain insights into the financial performance of nonprofit organizations. By creating a well-structured chart of accounts based on goals, nonprofits can measure performance using various metrics. This enables informed decision-making in areas like resource allocation and program evaluation.
Implementing managerial accounting principles can optimize financial management practices for nonprofits, ensuring efficient and effective allocation of resources to achieve mission-driven objectives.
Understand Indirect Costs
Indirect costs can be compared to the unseen threads that weave together the fabric of daily operations in a business, accounting for expenses that may not be directly tied to specific items or activities. These costs have a significant impact on financial statements, as they affect the overall performance of an organization.
To properly allocate indirect costs, nonprofits employ various strategies such as using cost drivers or activity-based costing methods. However, tracking indirect costs can pose challenges due to their nature and potential variability.
Accurate calculations of indirect costs are crucial for informed decision making and budgeting. Best practices for managing indirect costs include regular review and analysis, establishing clear cost allocation procedures, utilizing software systems for tracking and reporting, and conducting periodic audits.
Create Separate Accounts for Important Entries
To ensure accurate financial reporting and identify relevant accounts, it's beneficial to create separate entries for important or large transactions in your numbered chart of accounts. This practice allows for better organization and analysis of your financial data.
Here are three reasons why creating separate accounts for important entries is crucial:
Importance of categorizing expenses: By separating specific transactions, such as non-cash account entries, you can accurately track and categorize expenses. This makes it easier to analyze spending patterns.
Impact of accurate account numbering: A well-structured chart of accounts with distinct entries enables easier identification and tracking of specific financial activities. This provides a clearer picture of your organization's financial health.
Benefits of using sub-accounts: Sub-accounts within main categories allow for further granularity in expense tracking. They help break down expenses into manageable segments, providing valuable insights into cost centers or projects.
Integrating the chart of accounts with accounting software streamlines the process by automating data entry and ensuring accuracy throughout the system.
Example of Chart of Accounts Numbering
Imagine you're a small nonprofit organization wanting to create a clear and organized Chart of Accounts numbering system to manage your financial transactions efficiently. The example provided earlier in the article can serve as a guide for structuring your own numbering system.
Current Assets (account numbers 10000 - 16999)
10104 - Special Account
11200 - Payroll Checking Account
10670 - Petty Cash Fund
12154 - Accounts Receivable
12500 - Allowance for Doubtful Accounts
13189 - Inventory
14143 - Employee Advances
15350 - Prepaid Insurance
Property, Plant and Equipment (account numbers 17000 - 18999)
17090 - Land
17100 - Buildings Improvements
17365 - Equipment
17800 - Vehicles
18189 - Accumulated Depreciation - Buildings
18450 - Accumulated Depreciation - Leasehold
18900 - Accumulated Depreciation - Vehicles
Current Liabilities (account numbers 20040 - 24999)
20147 - Notes Payable
20232 - Accrued Expenses
21345 - SUTA Payable
22187 - Wages Payable
23100 - Interest Payable
24578 - Deposits from Customers
Long-term Liabilities (account numbers 25000 - 26999)
25143 - Stated Capital
25675 - Bonds Payable
25680 - Bank Loans Payable
Stockholders' Equity (account numbers 27000 - 29999)
27176 - Common Stock, No Par
27876 - Retained Earnings
29502 - Treasury Stock
Revenues (account numbers 30000 - 39999)
31010 Individual Donations
31722 Corporate Donations
32819 Foundation Grants
33410 Government Grants
Fundraising Revenues (account numbers 40000 - 49999)
41430 Fundraising Revenue
42342 Fundraising Revenue- Event Revenue
45469 Fundraising Revenue- Merchandise
47860 Fundraising Revenue- Other Revenue
Personnel Expenses (account numbers 50000 - 50999)
50170 - Salaries & Wages
50189 - Payroll Taxes
50232 - Benefits- Insurance
50689 - Payroll Processing Fee
Admin Expenses (account numbers 55000 - 55999)
55134 - Rent & Utilities
55151 - Office Supplies
55243 - Software & Subscriptions
55698 - Bookkeeping & Accounting
Program Expenses (account numbers 59000 - 59999)
59134 - Program Supplies
59151 - Client Support
59243 - Contracted Services
59698 - Travel & Meals
Other (account numbers 90000 - 99999)
91845 - Gain on Sale of Assets
96134 - Loss on Sale of Assets
*This is not an inclusive list of accounts. This is an example of accounts that may help with ideas of what accounts could be used.
Using a Chart of Accounts Template
Now that you have an example of a chart of accounts numbering system, let's explore how to use a chart of accounts template effectively.
By utilizing a template, you can save time and ensure consistency in your organization's financial reporting.
We can provide your organization with a chart of account template if you want to avoid the hassle of creating your own.
When customizing a chart of accounts template for your organization, consider its unique needs and requirements. We can help tailor the template by adding or removing account categories based on your specific industry or organizational needs.
