Be Audit Ready: Recording the Organization’s Financials
Begin with a consensus on the definition of
- The chart of accounts
- Funding sources (Who funds your organization and what are their reporting requirements?)
- Programs (What service or product does your organization provide or produce — what does it do?)
Reaching this consensus may require an implementation meeting. Mark McCallick, CPA, CGMA, professor of accounting at Santa Ana College, recommends using a questionnaire to facilitate the meeting and act as a centerpiece.
In this article, he provides some suggestions on building your chart of accounts in a manner that is practical and will satisfy as many users of your financial statements as possible. He also provides a sample chart of accounts he designed and one called the “Unified Chart of Accounts,” which was created by a number of major nonprofit support organizations. The second resource will give you spreadsheets that you can download and use as a learning aid.
Building Your Chart of Accounts
With your team, make a list of the accounts that your company will require. These will assist you in generating the reporting that all users of your financial statements demand.
Your accounting team or contractor will understand the types of accounts required to satisfy the majority of users by attending and participating in this meeting. The implementation meeting should have included a discussion of account names. As a result, all readers will know the terms and types of transactions recorded in each account.
What Is a Chart of Account?
A chart of accounts lists minor categories that fall under the broad categories of assets, liabilities, net assets, income, and expenses. Consider the chart of accounts as the foundation for the structure you are about to create. The chart of accounts is no exception: the firmer the foundation, the stronger the building.
Consider the chart of accounts as a filter via which information from the outside world enters your accounting system. You need to configure the reports thoroughly; otherwise, the results will be too general. The more specific you are, the more detailed reports you will get.
How Your Audit Report, and Your Tax Return Affect Your Chart Accounts
The “functional” expenses linked to programs, management and administration, and fundraising must be tracked by a nonprofit organization’s chart account. According to the Financial Accounting Standards Board https://www.fasb.org/.
Nonprofits have their own account of functional expenses. For example, taxing authorities (the IRS and state tax agencies), financiers, benefactors, and knowledgeable readers of nonprofit financial records all value it.
Because the statement of functional expenses tries to indicate the amount and proportion of each dollar spent in the three functional expense categories of program, management, administration, and fundraising, it’s critical. This classification appears to be that the more money an organization spends on programming, the more effective it is at fulfilling its objective.
Functional expense statements can be seen in an audit report and a 990. For a large group of financial statement readers, the ratio between the program and total expenses and the statement of functional expenses has become a barometer. As a result, any nonprofit’s chart of accounts must have functional spending categories.
What is recommended in QuickBooks?
Create the three functional expense categories of “Program,” “Management and Administration,” and “Fundraising.” These accounts will be “major categories,” and you will not post transactions directly to these accounts. Next, set up “sub-accounts” underneath each major functional expense category as needed.
This setup may seem redundant (for instance, you will have the sub-account “Salaries” under each major functional expense category). However, the reality is that you do have salaries in each category (for example, the executive director’s salary may be split between the three major categories).
The best part of this methodology is that you can create a report in QuickBooks that shows not only how you spent in the functional and natural categories but also the percentages of total expenses related to each functional expense category. This information, as explained above, is very important to many readers of your financial statements.
Create an expenditure account for each of the three functional expense categories of “Program,” “Management and Administration,” and “Fundraising” in QuickBooks. These accounts will be “major categories,” and transactions will not be posted immediately. Then, create “sub-accounts” beneath each major functional expense category as needed.
For example, compensation can be one of them. I.e., administration, fundraising, and programs may share the executive director’s salary payment. The following video shows how a nonprofit can use QuickBooks https://www.screencast.com/t/F7c9MpmKL . There is also The Unified Chart of Accounts (UCOA) is a methodology was created by a group of nonprofits. The UCOA bases its format on financial line items in IRS Form 990. Use the following link to find a few samples of spread sheets and useful files: https://www.accountingportal.com/unified-chart-accounts-nonprofit-organizations/
The UCOA uses the QuickBooks Classes application to produce these functional categories, whereas my method directly creates the direct operating expenses in the accounts chart.
Learn more about all aspects of nonprofit accounting by attending the Sunshine Certificate in Nonprofit Management class on Accounting for Time & Money class. Click here for the yearly schedule to find the next class.
Source: TechSoup provides the connections, expertise, and resources to unlock the power of tech for social good. If you work at a nonprofit, library, or foundation in the US, your organization is potentially eligible for donated or discounted software, hardware, and services through them.
Mark McCallick https://www.techsoup.org/support/articles-and-how-tos/quickbooks-for-nonprofits-setting-up-the-chart-of-accounts