Lesson 2 in the course Intro to Nonprofit Accounting
In this lesson, we’re going to take a deeper look at accounts: what they are, how you create them, and when they are used. If you are interested in setting up an accounting system for your nonprofit, this is the lesson for you!
As I mentioned in the first lesson, “What is Accounting?”, accounts are names and numbers that you set up to represent the five areas of accounting that you are tracking:
- Asset = something you own
- Liability = something you owe
- Equity = your overall worth
- Income = money you get
- Expense = money you spend
When accounts are created in an accounting system, they are organized using names and numbers. Account numbers are, for the most part, up to you and how you would like to organize them. However, each type of account has a thousands range they’re usually created in:
The Chart of Accounts
The chart of accounts for your organization is really just the “list” of your accounts. Chart just makes it sound fancy. This list is created by your organization to meet its unique needs; however, here is a sample nonprofit chart of accounts that you can use if you need guidance. Most software has a default they start you with, and/or the IRS has their UCOA (Unified Chart of Accounts) that you can use as well.
Your organization will only have one chart of accounts, so make sure to choose/create one that makes sense for your operations. Below we will take a look at some example accounts. As we go through this, I suggest having a notepad or computer with you to write down ideas for your own accounts.
Examples of Accounts
Again, accounts represent those five areas of your organization that you’re tracking:
- Asset = what you own = 1000 range
- Liability = what you owe = 2000 range
- Equity = overall worth = 3000 range
- Income = money you get = 4000 range
- Expense = money you spend = 5000 range
Let’s start with Assets. Assets can include:
- Cash (checking, savings, and petty cash balances)
- Accounts receivable (invoices that you haven’t been paid for yet)
- Inventory (your stock of items’ value)
- Fixed assets (land, vehicles, property, equipment, etc.)
- Other (investments, depreciation, long-term assets, etc.)
Asset accounts are numbered in the 1000 range, and their names will need to be descriptive. The number will be listed first, followed by a dash, then the account name. For example, “1000 – Checking”. See? It’s that simple. This account’s number is 1000, and the name represents what it is, which is your checking account. Going forward this account will be used to track how much money is in your checking account. Below are a few more examples of asset accounts:
- 1001 – Savings
- 1100 – Invoices Receivable
- 1200 – Inventory
- 1300 – Land
Next are your Liabilities. A liability, being money you owe, can include:
- Accounts payable (money you owe vendors or suppliers)
- Short-term debt (credit balances, short-term loans, etc.)
- Long-term debt (school loans, mortgage, etc.)
- Accrued liabilities (payroll taxes, wages payable, etc.)
Liability accounts are numbered in the 2000 range, and should have names that are reflective of what they are. For example, “2000 – Accounts Payable”. Going forward, this account would be used to track the amount of money you owe others from invoices or bills you’ve received. Below are a few more examples of liability accounts:
- 2100 – Credit Card Balance
- 2200 – Property Mortgage
- 2201 – Vehicle Loan
- 2300 – Payroll Tax Payable
Next is your Equity. Equity, being your overall worth, can include:
- Retained earnings (net income for your organization)
- Other equity (owner’s equity, stockholder’s equity, etc.)
- Unrestricted, temporarily restricted, and permanently restricted net assets (nonprofit-specific)
- Fund balances (nonprofit-specific)
Equity is the value of your assets, minus your liabilities. In other words, the money you have, less the money you owe, is your worth. This information is reflected on a Balance Sheet report, which we will cover in lesson five. Below is a section titled “Nonprofit Equity” which will go into more detail and provide examples.
Next is Income. Income, being money you get, can include:
- Contributions (tithe, gifts, donations)
- Pledges (money promised to you by a donor)
- Grants (money you’ve received for a specific purpose)
- Revenue (received from selling an item or performing a service)
Income accounts are numbered in the 4000 range, and likewise should have names that are reflective of how and/or where you get the money. For example, “4000 – Contributions Income”. Going forward, this account will be used to track the money you receive from contributions. Below are a few more examples of Income accounts:
- 4001 – Designated Donations
- 4100 – Pledge Income
- 4200 – Grant Income
- 4300 – Sales Revenue
Finally we have Expense. Expenses, being money you spend, can include:
- Everyday expense (office supplies, printing cost, salary, etc.)
- Bills (rent, utilities, purchase orders, etc.)
- Program expenses (fundraiser supplies, program vendors, etc.)
- Other expenses (meals/entertainment, fees, health bills, etc.)
Expense accounts are numbered in the 5000+ range, which means they can range from 5000 onward. Typically you will have more expense accounts than any other type of account, so the number range allows for growth. Like the other accounts, expense accounts should have names that are reflective of how and/or where you spend money. For example, “5000 – Salary Expense”. Below are a few more examples of expense accounts:
- 5001 – Rent/Mortgage
- 5100 – Office Supplies
- 5200 – Meals and Entertainment
- 5300 – Fundraiser Supplies
With all of the above in mind, your chart of accounts could be similar to this:
This is where fund accounting emerges. If you need a recap of fund accounting, please read through lesson 2. With that content in mind, let’s take a look at some examples of Funds.
A fund is a breakdown of your equity. The money you have and owe can be intended for a specific purpose (fund), therefore you will need an equity balance to represent the fund’s overall worth. If you know what funds need to be created, you can set each up as its own equity account. Equity is numbered in the 3000 range:
- 3000 – General Fund
- 3100 – Missions Fund
- 3200 – Building Fund
- 3300 – Special Projects Fund
Each of the above examples will have its own balance and value across your entire organization. As per nonprofit standards, there are further classifications for these funds which we will cover in a later lesson. Until then, focus on creating equity accounts for each of your funds so that you can move forward.
Best Practices for Creating Accounts
1. Create only what you need
If you don’t have any debt, don’t worry about creating liability accounts. Likewise, if you don’t own anything outside of the money in the bank, don’t worry about fixed assets. Your chart of accounts is completely unique, and should be tailored for your organization alone. You are always able to make changes and adapt if needed.
2. Find the right amount of detail
The purpose of accounts is to accurately record transactions, which will allow you to generate accurate reports (lessons four & five respectively). With that in mind, you want to think through what information you are going to track. This will take some time, and you will most likely make changes down the road. Try to keep it detailed enough to give you the information you want, but not so complicated that it’s impossible to use.
3. Don’t be afraid to make changes
Seriously, you will need to change things. Down the road you will want to break an account into multiple items, or realize you don’t need to track something like you originally thought. Again, your chart of accounts is unique to your organization, so don’t be afraid to make it exactly what you need.
Accounts are the foundation for any accounting system. With the knowledge you’ve gained in this lesson it will be helpful to begin creating your chart of accounts. Go through each type of account and think through what you will need. Write it all down, and then come back for the next lesson.
Once the foundation is laid you can begin framing. In the next lesson we are going to learn how you use these accounts you’ve created. Some call it the general ledger, but more broadly we refer to them as transactions. As you spend, receive, and manage money you will begin using your accounts on a daily basis.
P.S. — Are you using QuickBooks? You should try our software. We designed Aplos Accounting specifically for nonprofits like yours!