Nonprofit Chart of Accounts - All You Need to Know

Nonprofit accounting is uniquely difficult given the need to maintain accountability and comply with complex public, governmental, and donor requirements. 

You need a high-level accounting system that promotes transparency, accountability, and alignment with your mission. 

This is where the nonprofit chart of accounts comes in, but it can be hard to create, understand, and maintain. In today's guide, we'll discuss the basics of this document and how it can optimize your financial management. 

To make things easier, you'll need a robust accounting system comprising an accounting tool and dedicated nonprofit financial management software. 

As a tailored financial management tool for nonprofits, Martus imports your chart of accounts from your accounting software to use in budgeting, forecasting, and reporting. 

Integrating Martus with your accounting software and chart of accounts helps automate data entry, ensure consistency across financials, and provide real-time insights. 

Schedule a detailed consultation with our team today to discover how Martus can streamline your nonprofit's financial strategy. 

What Is a Chart of Accounts?

A chart of accounts is a structured, table-style list that categorizes all the financial accounts a business or nonprofit uses to record transactions in an accounting period. 

In the case of a nonprofit, these transactions are then recorded in the nonprofit general ledger, which allows you to arrange and analyze financial data further. 

The nonprofit chart of accounts, or COA, is a foundational element for budgeting, forecasting, and financial reporting. 

Like most small to mid-sized charitable organizations, you probably got started with COA by creating the document in a spreadsheet. Your COA may look like the sample below.

Benefits of Using a Unified Chart of Accounts

A unified chart of accounts, or UCOA, is a standardized chart of accounts that meets IRS compliance requirements. 

The unified version uses a complex hierarchical structure where all your nonprofit’s account information is captured in a single, detailed list of codes. 

Here's why the unified chart of accounts matters in a nonprofit organization:

• Ensuring Accurate Financial Reporting: The unified chart of accounts is a fundamental basis for budgeting, forecasting, and reporting. With the right accounting system, the document helps you produce accurate and detailed financial reports for boards, the IRS, and donors with minimal effort. 

• Better Compliance and Audit Readiness: The reports you generate from the UCOA provide the necessary information to file Form 990 with the IRS. Filing the form annually helps prove that you comply with Rule 501(c)(3), which maintains your nonprofit's tax-exempt status. The IRS and other external auditors also use the UCOA to examine various financial records to see if you meet certain standards and compliance requirements. 

• Streamlined Nonprofit Budgeting and Forecasting: The standardized accounting structure in the UCOA makes it easier to build nonprofit budgets and forecasts that align with your organization’s goals. You can also track your performance by programs or grants and conduct multi-year planning based on the information in UCOA. 

• Better Decision-Making: Organizing financial data clearly in the UCOA and streamlining financial reporting make it easy to quickly assess the effectiveness of your programs, allocate or reallocate resources wisely, and respond to financial challenges confidently. 

These benefits are significantly amplified when you include dedicated nonprofit financial management software in your accounting system. 

For example, when your COA or UCOA is aligned with Martus, you can create customizable real-time reports that capture accurate project or grant-level performance. 

You can also instantly adjust budgets based on actuals and create forecasts using consistent account structures.

Key Elements in a Nonprofit Chart of Accounts

Typically, a chart of accounts for a nonprofit organization has five major categories. These are:

1. Assets: This category lists what the organization owns, such as equipment, cash and cash equivalents, and accounts receivable. 
2. Liabilities: Everything your organization owes, such as loans and accounts payable, falls under this category. 
3. Net Assets: The difference between the overall assets and overall liabilities is called net assets in a nonprofit, and it measures the resources available for continued use. 
4. Revenues: Income from donations, dividends, earned interests, payment for services, grants, or corporate philanthropy falls under the revenue category. 
5. Expenses: The expenses category includes all costs associated with operating the organization and running programs, including rent, staff salaries, utilities, marketing, and fundraising costs. 

How to Set Up a Chart of Accounts for a Nonprofit Organization

You can use a nonprofit chart of accounts template to create a functional and practical COA.  The problem is that templates are often not fully customizable to your specific needs. 

Here are the critical steps to creating a reliable chart of accounts for your organization:

1. List the Available Accounts: Start by identifying and listing all the accounts you use. 
2. Group the Accounts into Categories: Place each account in the right category we discussed earlier, including assets, liabilities, net assets, revenues, and expenses. 
3. Create Header Accounts: To make navigating the COA easier, introduce summary accounts or headers to cluster related accounts. The headers do not directly contain recorded transactions, but rather aggregate data for easy reporting. For instance, you can have a “Cash and Cash Equivalents” header with checking, petty cash, and savings account balances. (All these balances will be combined and shown as one cash balance in the financial statements.)
4. Make Sub-Categories and Sub-Subcategories: These are the sub-accounts and sub-subaccounts under the categories. For example, the assets category can have “Bank" as a sub-category. Under this, you can have Checking, Savings, and Petty Cash as sub-subcategories. 
5. Assign Numbers to Categories and Accounts: You'll need a chart of the accounts number system with codes to further group and identify categories and accounts. For example, all your assets can fall within the 1000 to 1999 range, and the liabilities within 2000 to 2999. Leave enough numbering space between categories and accounts for future accounts you may need. 
6. Provide a Column for Additional Notes: Each account should have a clear title and a brief description of the type of transactions it should capture. An extra description column helps maintain the integrity of financial data because every collaborator sticks to a uniform recording system. 
7. Implement and Review: Test the newly created COA within your accounting system. You might need to set up each account with the accounting tool. Use a series of transactions to check the functionality of the COA. Review and update your COA regularly to match your evolving needs. 

Creating the chart of accounts might sound easy, but managing it can be trickier if you are using spreadsheets or your organization is large. 

Martus integrates with various accounting software and imports your chart of accounts to help you budget, forecast, and report on your finances. 

Here's how your accounts interact with Martus to make it easier for you to manage them in the chart of accounts and General Ledger:

• For API integrations with accounting tools like Sage Intacct, Martus syncs the chart of accounts every weeknight. 
• For file-based integrations with platforms like Aplos, a Martus admin maintains the General Ledger account information. 

By integrating with your accounting tool and chart of accounts, Martus reports and allows budgeting to assets, liabilities, equity (net assets), income (revenue), and expenses. 

Make nonprofit financial management a breeze with Martus—sign up for a product demo today. 

How to Design a Chart of Accounts Number System

A chart of accounts numbering system or convention depends on the size and complexity of your nonprofit. 

Let's check out some quick design tips to ensure your numbering system aligns with GAAP (Generally Accepted Accounting Principles):

• Stick to Standard Digit Codes: Use the universally accepted digit-based system for the categories and accounts. For assets, the digit codes start with 1. The ones for liabilities begin with 2, net assets with 3, revenues with 4, and expenses with 5. The numbers can range from 3 to 5 digits, depending on the number of accounts you have and the size of the organization. 
• Choose the Right Number System: For a small nonprofit, you can use a simple sequential system, such as 1000, 1100, 2000, 2100, and so on. You can use a complex hierarchical structure for a larger nonprofit with diverse operations and multiple entities, locations, or departments. For example, 1100-02-033, where 1100 shows the account type, 02 the department, and 033 the specific account. 
• Label Categories and Accounts Based on Assigned Numbers: Mark various categories and accounts according to the number you've assigned them. For example, with 1000-1999 being for Assets, Cash and Cash Equivalents can be 1000, and Accounts Receivable can be 1100. 
• Leave Room for Future Account Numbers: Ensure enough room between the numbers in each category and accounts to accommodate new accounts. You'll already be safe if you use 1000-1999 for assets, 2000-2999 for liabilities, and so on. For example, in the 1000 series for Cash and Cash Equivalents, you can have 1100 for Accounts Receivable, 1110 for Contracts Receivable, and so on. 

A reliable nonprofit accountant can help you design your chart of accounts correctly, including the numbering system. 

Common Mistakes to Avoid in a Chart of Accounts for a Nonprofit Organization

Even when working with experts, you'll want to watch out for common nonprofit chart of accounts mistakes such as:

• Adding too many accounts and lengthy descriptions, which makes the document confusing, suffocating, and difficult to understand. 

• Not aligning your COA with industry standards, which makes it difficult to maintain compliance and benchmark your financial performance with other similar organizations. 

• Inconsistent naming, categorization, and numbering, leading to confusion and errors. 

• Treating COA as a rigid rather than living document, which limits how it evolves as your organization changes in structure, operations, size, or financial reporting needs. 

• Not leveraging technology, which can mean continued human error and chaotic financial management. 

Speaking of technology, you'll want to ditch spreadsheets in favor of a combination of accounting software and a customized financial management tool. 

You can connect your accounting software to Martus, our specialized nonprofit financial management software, to import your chart of accounts, automate tasks, produce reports, and manage multiple budget categories. 

Schedule a discovery call to see how Martus can streamline your nonprofit accounting process. 

Frequently Asked Questions (FAQs) 

Let's wrap up with a few questions nonprofit professionals usually ask about the chart of accounts. 

What Is the Purpose of Account Numbers in Accounting?

The account numbers used in the chart of accounts help with accounting by uniquely identifying and organising individual financial accounts within your accounting system. 

When combined with financial management software like Martus, the account numbers can be used to quickly refer to and locate accounts and generate advanced financial reports and analyses. 

How Do I Choose the Right Numbering Format for My Nonprofit?

To choose the right COA numbering format, assess your organization’s model, size, and unique financial transactions. Then, customize the format to suit your financial operations. 

If your organization is small, use the 3-4 digit code format. For a larger organization, you can choose the five or more digits format. 

Can I Customize a Standard Chart of Accounts Template?

You can customize a standard chart of accounts template to better suit your organization's needs. For example, you can rename accounts, adjust the numbering system, remove obsolete accounts, or add new ones. 

How Often Should I Review My Nonprofit Chart of Accounts?

You can review your nonprofit's COA at least once a year, but you might have to do so monthly, quarterly, or semiannually. 

The frequency depends on your needs and how they evolve. If you need to add new accounts or remove some during your fiscal year, you can always review the document. 

Conclusion

Accounting for all five typical nonprofit categories requires more than just using a chart of accounts. The document forms the basis of your financial management, but it also requires a robust accounting system.

A sound accounting system consists of an accounting tool and dedicated nonprofit financial management software to import your chart of accounts for budgeting, forecasting, and reporting. 

Martus connects with accounting tools and pulls your COA to streamline how you create overall or program budgets, plan analytical scenarios, and produce reports in real time. 

The alignment in budgeting (planning), accounting, and reporting promotes financial transparency, compliance, accountability, and strategic decision-making. 

Enjoy financial clarity and make smarter decisions with Martus—book a consultation with our team today.