Based on the questions we receive and the nonprofit clients we help, apparently a lot!
Accounts Are Mandatory
Every transaction recorded in your nonprofit’s QuickBooks (or other accounting software) must be coded to two or more accounts in your chart of accounts. You can think of each account as a “tag” that says something about the nature of the transaction. For example, a cash donation of $100 will impact, obviously, a cash account, as well as an income account for contributions.
Accounts Can Be Hidden
Depending on how the transaction is entered, the accounts affected are often hidden. The designers of QuickBooks are trying to keep the accounting system “out of the way” so you can focus on processing your transactions. For example, if you enter a sales receipt for a donation, you may not see any clue as to which accounts are being impacted. But visible or not, rest assured that accounts in your chart of accounts are being affected! And those accounts drive the appearance and the usefulness of your accounting reports.
Optional Tags Can Provide Richer Information
Beyond coding to accounts in the chart of accounts, all other ways of tagging transactions in QuickBooks are entirely optional. These optional (but important) tags may include
- Customer or vendor name
- Location code (QuickBooks Online only; also can be used to indicate department or activity)
By taking advantage of optional tags, you can easily keep track of all sorts of other information you want to know, such as
- What was the name of the person or entity who gave us money?
- What was the nature of money received, such as a corporate gift vs. an individual gift?
- Which specific service did the person pay for?
- How much have we provided in discounts or scholarships?
- Who did we pay money to?
- What functional areas do transactions pertain to (program, management & general or fundraising) so we can prepare our 990 and audited financial statements?
- Which funds are restricted and how much have we spent so far of those restricted funds?
- Can I see a report of each program separately so we know which ones are profitable and where we are spending the most money?
Chart of Accounts Bloat. Ugh!
We commonly find nonprofit managers and bookkeepers try to use the chart of accounts to answer ALL of these questions, which results in adding many accounts to the chart of accounts.
Factors contributing to even more accounts:
- Changes in programs and activities over the years which cause new accounts to be created
- Changes in people in charge of the books over the years who create new accounts based on preferences or perceived needs
- The fact that nobody ever deletes an account
As a result, you end up with a bloated and cumbersome chart of accounts. Ugh!
A bloated chart of accounts causes two problems:
- Inefficient and error prone bookkeeping
- Inaccurate and confusing financial reports
Is YOUR chart of accounts in need of a diet? Does it need to get into better shape? Where is the best place to start?
Enter the Nonprofit Chart of Accounts Grand Tour
This year we will offer a series of blog posts under the theme “Nonprofit Chart of Accounts Grand Tour.” We’ll talk about which accounts to include in your nonprofit chart of accounts. We’ll go over how to use the various accounts and how to make sure transactions get coded to the right account. And we’ll tell you which accounts to avoid and what to do instead to capture all that information you wish to track.
As background for the Tour, you may wish to check out a few of our earlier posts:
What information are you trying to track using your organization’s chart of accounts? What is working? What isn’t? What are your biggest frustrations with your chart of accounts? We welcome your questions so we can address them. You might get some valuable answers – for free – if we choose to blog on your question. In any event, we’ll endeavor to reply to each person and at least point you in the right direction. Please enter your comments below. Your participation will help us to help you succeed with QuickBooks!