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The Vocabulary for Talking About Nonprofit Finance: A Primer for Your Chart of Accounts

Updated: Apr 22

If you are the unfortunate soul charged with creating the chart of accounts for your organization off in a room by yourself, STOP right now! Your financial reports are an important way to tell the story of your organization, and you can’t write that story alone.

The structure of your data file, with the chart of accounts as its backbone, provides the vocabulary, the grammar, and syntax, for all your future financial conversations, so it is important to have all the users of this information at the table. You can’t talk about concepts you don’t have words for.

So – who are these stakeholders, the users of your financial information? They include your staff, your board, your constituents, your funders, and your auditor as well as regulatory agencies like the IRS. Consider what information each of these users will need to see, and make sure you’ve got a way to capture any specific details each of them will need. At the end of the day, all of these stakeholders want to know one of two things: 1) Are you okay? and 2) Are you using your resources wisely to move your mission forward?

The Statement of Position (what the for-profit world calls a Balance Sheet) is a snapshot of your organization at a particular moment in time. This is the “Are we okay?” report. It is made up of three types of accounts: Assets, Liabilities, and Net Assets.

Assets have been described as What You Own: your bank and investment accounts, your receivables, prepaid expenses, and fixed assets. Nonprofits sometimes have several receivable accounts to separate general receivables from pledges and grants, and allowances for doubtful receivables. The prepaid expense account can be confusing, but this is just the place to park expenses that are for a future financial period. A good example of this is that insurance as the policy period and your fiscal year are rarely the same. Fixed assets include any land or buildings you may own, as well as equipment and furniture, less any accrued depreciation.

Liabilities are What You Owe: accounts payable, credit cards, loans or lines of credit, as well as deferred revenue. Deferred revenue is the yin to prepaid expenses yang: this is money you’ve received for work you haven’t done yet – advances on government contracts, admissions to next year’s conference, tickets sold for next season’s productions. In order to be considered deferred revenue, it has to be something you will eventually earn. (This is NOT The place to track restricted contributions, which should be shown as income even if the restrictions have not been met.

And finally, Net Assets are what is left over when you subtract your liabilities from your assets. They come in three (soon to be two) flavors: unrestricted, temporarily restricted, and permanently restricted. New rules taking effect in December 2017 will condense these into just two: net assets WITH donor restrictions, and net assets WITHOUT. This will help clarify that it is the donor, and only the donor, who can put a restriction on a contribution.

If I’m reading your financial statements and want to know if you’re okay, it helps to know how much of your unrestricted net assets are locked up in STUFF (your net fixed assets less any loans you took out to pay for them) and what is actually Available for Operating, so I like to create sub-accounts to spell that out.

The second primary report is the Statement of Activities (also known as the Income Statement, or Profit and Loss), and as the name implies it shows your activity over a given period of time. This is the “Are we using our resources wisely?” report, and is the one your staff and board probably budget against and look at most often. It is made up of two types of accounts, Income and Expenses. (There might also be a third type, Cost of Goods Sold, but it is less commonly used for nonprofits.)

Income is fairly straightforward because most organizations have a pretty good idea where their money is coming from. You’ll have Contributed Income: individual donations, corporate & foundation grants, government grants, and in-kind donations. Hopefully, you have Earned Revenue: memberships, ticket sales, program services, and government contracts. You might have a bit of Investment Income: bank interest or dividends, realized or unrealized gains and losses. You’ll also need a group of income accounts for each of your special fundraising events because this information is important to both your Board and the IRS.

At the end of the day, both your Board and the IRS want to know “How much did you make on the gala?” so make sub- accounts for both the gift and non-gift portion of the income AND income sub-accounts for each of your key event expenses: space rental, catering, entertainment, printing, and so on. While this is counter-intuitive, it lets your software tally up how your event did, and keeps those fundraiser-specific expenses from getting mixed in with your operating activity. Finally, you might make an account for “Miscellaneous Income,” just so small random things you get now and then have a place to land.

It’s when we get to Expenses that default charts of accounts really fail us. First off, they are usually alphabetical, and I don’t know anyone who thinks about their organization alphabetically. (Automobile expenses, bank fees….Salaries are a huge part of your budget, but would be way down the list alphabetically. You want them up at the top as they are one of your biggest expense categories.)

So this is where you really need to grab your ED and your program people, your grant writer and maybe your board treasurer, as well as a copy of your last audit and hash out what you need to track and be able to report on. Make sure the major groupings make sense to your staff. Take time to map the expense categories that work for you internally to the report formats required by your funders, and beg your development staff to start with your own internal accounts when creating grant budgets.

Everyone will have a group of Payroll expenses. I like a sub-group of Taxes and Benefits, to separate employer FICA taxes from health insurance, unemployment, and other benefits specific to your needs. Most organizations will have a group for professional fees and subcontractors. This will be much more detailed for a theatre that hires a lot of technical and artistic contractors than for an organization that has only an outside accountant.

Keep the list as simple as you can, and group similar expenses together. Don’t duplicate the same account for different functional categories, as you can capture that information with Classes. (So one account for printing, not multiples for printing – fundraising, printing – program, and printing – admin)

Name the accounts in a way that makes sense to you. If no one is sure exactly what goes in the “Dues and Subscriptions” account, get rid of it and make ones you can understand…maybe “Membership Dues” and “Newspapers and Publications” or “Software Subscriptions”.

Because we read from top to bottom, make sure your most important categories (Payroll Expenses!) are at the top where they will get more attention. A condensed Statement of Activities should fit easily on a single page; a fully expanded one should fill no more than two – at 100% in a legible font.

The goal is not to create accounts that no one but the accountant understands, but to succinctly capture the information needed to answer those two important questions: “Are we okay?” and “Are we using our resources wisely to advance our mission?” By involving all the people who will use your financial information in creating the language – the chart of accounts – you use to talk about it; you bring the financial function back into the heart of your organization, focusing the attention on “mission-crunching” and not just “number-crunching.” Honestly, isn’t that really what we’re here for?

This post was originally written for QuickBooks Made Easy and published on the NeonCRM blog and High Rock Accounting.

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