How to Avoid Nonprofit Financial Pitfalls: Chart of Accounts Overview
NFP Partners has offered articles which look at the most common pitfalls our accounting services clients make. These articles focus on best practices. In more detail, the articles aim to improve processes and ensure solid internal controls which protect the assets of the organization.
In this article, we will focus on the core for successful accounting practices and financial reporting of your organization, your chart of accounts (COA).
The chart of accounts serves as the framework of an organization’s accounting system, classifying all accounts used in the general ledger as an asset, liability, net asset, revenue or expense.
Furthermore, it is what managers and accounting staff use to “code” an item that needs to be recorded in the accounting system. These codes are key to creating the organization’s financial reports.
Designing Your Nonprofit’s Chart of Accounts
A multi-dimensional chart of accounts structure in a nonprofit organization is key to successful financial reporting. This type of structure allows the COA to be set up according to the needs of the nonprofit. The standard general ledger accounts are included in the structure.
Other segments are also included, such as program, funding source and restriction. These segments enable a nonprofit to produce required reports. These reports include a Statement of Functional Expense or Statement of Financial Position with Net Assets categorized by restriction type. Funding source segments allow a nonprofit to easily categorize grant funding and track based on that grants budget period.
No matter the structure of the various codes in an account structure, we recommend each account be clearly defined. Additionally, this ensures consistency in coding across departments.
Quality Over Quantity For Your Nonprofit Organization
The COA should be built to last for multiple years. This allows for easy comparison of financial data over time. It is easy to add a new account code.
Before you know it though, your two-page chart of accounts grows to four pages. One individual should be assigned the responsibility of adding new accounts. Also, each requested account code should be reviewed for the determination of need.
Questions should be asked. For example, what is the purpose of the new account versus using an existing account and expanding the definition? Existing accounts not playing significant roles in financial reporting may be better off being absorbed by others, but not without a formal course of action to assess the impact of doing so.
Change is inevitable and an organization’s business practices, processes, and structures, like the accounting system, can be affected by that change. However, a systematic process for determining how best to capture a new program, grant or department will benefit the organization for the long term.
While adapting to change might be considered progress, too many changes to the COA can disrupt the easy comparison of financial data.
In summary, create accounts that are meaningful for your organization, clearly define each account and maintain the account structure and carefully evaluate additions.
These best practices will lead your organization to success and help you avoid some unwanted nuisances in the future. For more articles on how to avoid financial pitfalls, click here.