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How to set up a chart of accounts for your non-profit organisation

Money Matters

How to set up a chart of accounts for your non-profit organisation

If you’re managing finances for a non-profit organisation (NPO), you’ll need a chart of accounts (COA).

All your money flows through the COA—the basis of your financial reporting and analysis.

The COA is an index of all financial accounts in your NPO’s nominal or general ledger list. With these accounts, you group specific categories, such as:

  • Assets: What you own—such as cash, receivables (debtors), inventory, and fixed assets.
  • Liabilities: What you owe—such as payables (creditors), loans, accrued expenses, and deferred income.
  • Funds (or equity): Represents the net worth of your organisation.
  • Income: Money coming in from grants, fundraising, goods, services, and investments.
  • Expenditure (direct costs and expenses): Money going out for bills, salaries, rent, utilities, raising funds, etc.

Your financial software will use these categories to aggregate transactions into your NPO’s financial statements and reports, such as the balance sheet and income and expenditure statement. 

Setting up your COA is essential for meaningful and relevant internal controls. It’s also vital if you want to create external reports for outside funding sources.

Here’s our 10-step guide to setting up a chart of accounts for a non-profit:

1. Devise the high-level structure for your chart of accounts

2. Structure your assets

3. Structure your liabilities

4. Structure your funds

5. Structure your income

6. Structure your direct costs

7. Structure your expenses

8. Apply departmental overlay

9. Restricted and unrestricted fund analysis

10. Maintain your chart of accounts

Final thoughts: Review your accounting needs

1. Devise the high-level structure for your chart of accounts

The COA is numeric and typically follows a standardised order at a high level. This makes it easier to sort accounts by assigned categories for reports and when locating specific nominal ledger accounts.

It’s traditional to use the following numbers for each category:

  • Assets: 1000-1999
  • Liabilities: 2000-2999
  • Funds: 3000-3999
  • Income: 4000-4999
  • Direct costs: 5000-5999
  • Expenses: 6000-9999

In the following steps, we’ll examine each account category and devise the account structures that need to sit below them.

There’s a balance to be struck in the number of accounts. Introducing more accounts allows a more detailed analysis, but too many accounts make it hard to see quickly and clearly what is happening.

2. Structure your assets 

The asset structure for most NPOs is relatively simple and needs to be split between current and fixed assets.

Current assets

Current assets typically comprise categories such as:

  • Cash and bank
  • Receivables or debtors (the money commissioners owe you or customers for whom services are delivered)
  • Inventories if the NPO is producing or holding goods of any value
  • Prepayments or deposits.

You can further subdivide each of these categories as appropriate. Consider which categories you need and what level of detail is required. For example:

  • You won’t need an inventory category if you don’t produce or hold any goods.
  • If prepayments are relatively small, you won’t need to subdivide this category.

Fixed assets

You purchase fixed assets for the long term. Some of the more common categories of fixed assets are:

  • Land
  • Buildings
  • Plant (e.g. factories)
  • Office and computer equipment and software
  • Vehicles
  • Furniture and fixtures
  • Leasehold improvements
  • Investments.

Which of these categories you’ll need will again depend on your activities.

You might not need a plant, land or building category. But you may own equipment, software, furniture, and fixtures. 

3. Structure your liabilities

The account structure of liabilities within a COA tends to start with short-term or current liabilities (those becoming due within 12 months), followed by long-term liabilities.    

  • Short-term liabilities will include trade creditors (for goods and services purchased but not yet paid for), bank overdrafts, and loans due within a year.
  • Long-term liabilities include loans due after more than one year, leases, and, where applicable, multi-year grants paid in advance.

4. Structure your funds

The standard accounts for NPO funds are unrestricted and restricted income funds. However, some non-profits may have endowment funds and occasionally revaluation reserves.

We discuss restricted and unrestricted funds further in step nine.

5. Structure your income 

Review the main types of income received by your NPO. It would be best if you split these into separate accounts.  

You should typically identify fundraising income and legacies separately from income for NPO activities (coming from contracts or grants), trading, and investment income.  

If it’s helpful, you might want to split public fundraising from corporate fundraising and government grants from trusts and foundations.

6. Structure your direct costs

Direct costs are directly associated with delivering the charitable activities of your NPO.

These will typically include salaries, other costs of staff employment, and the contract cost of any third parties associated with the delivery of those activities.

7. Structure your expenses

Once you’ve accounted for direct costs, you’ll need to analyse your remaining expenses.

These will be the organisation’s overheads and typically include salaries of support staff, facility costs, professional fees (legal and accountancy), marketing expenses, utilities, printing, postage, IT, and telephony.

8. Apply departmental overlay

For larger NPOs, it may be desirable to analyse income and expenditure in different parts of the organisation (with a geographical segmentation or a functional analysis).

Typically, you do this by devising a set of departmental codes and applying these to your financial transactions.

With some software, this departmental code is appended to the nominal ledger account; in others, it’s treated as a separate field.

9. Restricted and unrestricted fund analysis

If you receive grants or raise funds for specific projects, you’ll often need to treat that income as ‘restricted’ and account for it and all matching costs separately. 

In a COA, this is best handled as an overlay, using the same basic accounts with a set of fund codes. You can then analyse income and costs for all such grants or projects.

This will help you accurately report to grant providers, aggregating restricted and unrestricted income and costs.

10. Maintain your chart of accounts

You should review your COA annually to assess whether it still works. You might want to tie it to the budget cycle.

However, you might also want to review the COA if you’re putting in a new finance system or if there is growth or a change in reporting requirements.

Final thoughts: Review your accounting needs

How you do your accounting is up to you but understand that NPOs have unique and complex accounting practices that often need oversight from multiple stakeholders.

Because of your complicated budgets and funding sources, you may want to use accounting software with a degree of automation.

It’ll make your job easier but also leaves you room to grow as your finances get more complex.

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