On the surface, setting up your nonprofit accounting chart of accounts would seem to be a fairly straightforward process, but in fact, there is a lot of strategy that goes into it — or that should go into it — to save you a lot of work and headaches down the road.
The Chart organizes one of your most valuable assets: your operational and financial data. When set up correctly, your chart will enable you to see trends, issues, and opportunities within your day-to-day operational and financial data. Because of this, a well-organized Chart will make it easier for you to make better, faster and more informed decisions to move your organization forward. So, the time you spend evaluating your Chart will typically be among the most worthwhile time you’ll spend on your organization. Really!
Nonprofit Chart of Accounts Best Practices
The Chart should be aligned to the needs of your organization rather than being set up arbitrarily just to capture a statement of activities. There’s truly an art to setting up the Chart, so you’ll want to understand the best practices so you can benefit from a structure that’s right for your organization. Here are several best practices for getting the most out of your Chart to meet the needs of your organization:
Evaluate your objectives to ensure that your Chart is aligned with the way you run your organization. Consider the following questions:
- What is the purpose of the chart? In general, Charts are designed for reporting purposes across three primary areas: Internal (e.g., board books; monthly analysis for management; budget variance; monthly close), External (e.g., auditors, organization members, financial institutions) and Tax. Since you can’t design a chart that meets all three requirements in one structure, select the primary one, and then use reporting tools to reorganize the data to meet the requirements of the other two areas.
- How much data do you want to keep in the General Ledger? As mentioned earlier, your reporting needs will determine the type of data you need to capture. You may want to rely on operational systems to track the details of your donations or contributions — for example use the General Ledger (GL) for summarizing daily, weekly, or monthly donation figures. However, if you want to track and report on detailed operational statistics that are combined with your financial data for detailed reporting purposes, then you need to include statistical accounts in the GL. For example, if a mission organization wants reports on how many families were fed in a specific time-frame, including details of the country where those families were fed, these details would need to be held in the statistical data included in the GL.
- Do we need 400 account titles? No, when we implement a nonprofit organization, it’s not unusual to see 800 to 1000 items in their legacy Chart of accounts. As per our best practice, we typically separate out the dimension piece and it shrinks down to 200.
- What are your statutory requirements? Here you need to pay close attention to requirements by location (e.g. country, state, or province).
Need Help Perfecting Your Nonprofit Chart of Accounts?
Read more in our White Paper entitled “The Art of the Chart” to get all the details on how to achieve a nonprofit chart of accounts that will help you accelerate your mission. And if you need expert guidance, AcctTwo can help you build the ideal Chart of Accounts for your organization, support you with expert accounting services, or help you move to best-in-class cloud-based nonprofit accounting software. Contact us today!