Imagine a world where your stakeholders can see exactly how contributions or investments are making a difference. A well-structured chart of accounts (COA) makes it possible — but what is a chart of accounts? Think of it as a detailed roadmap of all financial accounts in your organization’s ledger, categorized by assets, liabilities, equity, revenues, and expenses. Creating a clear and informative COA strengthens your organization’s accountability and demonstrates the impact of every dollar received. This article dives into 10 powerful tips for enhancing your chart of accounts. With clear examples included, you’ll learn how to optimize your COA for impactful financial reporting and achieve your organizational goals.

1. Implement a Numerical Classification System

COAs should follow standard guidelines and numbering conventions established by Generally Accepted Accounting Principles (GAAP). This approach ensures consistency and simplifies the identification and categorization of different account types, making navigating and understanding your financial structure easier. Asset reference numbers usually begin with a 1, Liabilities is 2, equity is 3, Income/Revenue is 4, and Expenses are 5, 6, and 7.

Example: Assign numbers 1000-1999 for assets, 2000-2999 for liabilities, 3000-3999 for equity, 4000-4999 for revenues, and 5000-5999 for expenses. Include sub-categories too. For example, under revenues, 4100-4199 could be for individual donations, 4200-4299 for grants, etc.

2. Allow Room for Growth

Start with a basic COA structure that addresses your current needs. But as your organization grows, ensure you have enough room to easily add new accounts under their proper categories. Also, before adding a brand-new number to the COA, scrutinize your accounts to see if there is an existing one under which an activity could fall. 

Example: Add a new sub-account for a recently acquired grant.

3. Utilize Short, Simple Descriptions

Your COA should have a concise, easy-to-understand description next to each account name and account type. These short descriptions are essential, as they help you quickly find the appropriate accounts to create financial statements and reports. 

Example: Description names like “Grants Receivable,” “Credit Card Payable,” and “Membership Dues” are concise, helpful descriptions.

4. Categorize by Fund Type

Creating separate account categories for donations, grants, and program income helps track the usage and restrictions of each fund, ensuring compliance and better financial management. Clearly distinguishing between restricted and unrestricted funds is crucial for accounting. It ensures that restricted funds are used according to stipulations and helps prevent misuse. Be sure each fund type is clearly defined and consistently used across all financial statements.

Example: Create sub-accounts within the revenue category for individual donors, corporate donations, fundraising events, temporary and permanently restricted funds, membership dues, etc. Also, instead of just “4100 – Donations,” use “4100 – Individual Donations (Unrestricted)” for clarity and consistency in recording transactions.

5. Include Budget Codes

Integrate budget codes into your chart of accounts to facilitate budget comparisons and variance analysis. This practice allows for more effective budget monitoring and financial planning.

Example: Add budget codes to account numbers, such as 5100-01 for salaries under the general fund and 5100-02 for salaries under a specific grant.

6. Refrain from Creating Too Many Accounts

Think of your COA as an index or a quick lookup table. To keep it simple, avoid creating a separate account for every transaction, sale, or utility. Deflect any ad-hoc reporting requests that could result in multiple additional accounts, subaccounts, and project numbers. Bloated COAs increase review times, reconciliations, coding errors, and system maintenance. Prevent headaches by keeping your COA uncomplicated and straightforward. 

Example: Instead of having separate expense accounts for website development, paid advertising, and graphic design, group all three into a general account for marketing costs.

7. Avoid Changing or Deleting Accounts Until After the Year-End Close

Changing, consolidating, or deleting accounts in the middle of the year adds complications, especially during tax season. It’s a best practice to wait until the end of the year — after your year-end close — to merge, rename, or delete accounts. 

Example: If your organization hasn’t applied for any federal grants by the end of your fiscal year, nor does it plan to, then there’s no need to have a category for that in your COA.

8. Implement Internal Controls

Establish strong internal controls to safeguard your financial data. Regular audits, segregation of duties, and access controls are essential to maintaining the integrity of your chart of accounts. Regularly audit internal controls to identify and address potential weaknesses or inefficiencies. 

Example: Set up a policy where one staff member handles account entry while another reviews and approves the entries, ensuring checks and balances in financial management.

9. Automate Where Possible

While you might create your first chart of accounts in a spreadsheet, using accounting software makes the process much easier. Using modern accounting software automates the coding of your chart of accounts. It also allows you to easily view your COA, record transactions, and generate financial reports in one place. In addition, it reduces the likelihood of errors, saves valuable time, and ensures that your financial data is consistently recorded and updated. 

Example: Use accounting software such as Sage Intacct or QuickBooks to automatically categorize things like expenses, generate financial reports, and more.

10. Seek Expert Help

Consider partnering with an accounting expert to create an accurate chart of accounts tailored to your organization. Even if you already set up your COA, your accountant can review the numbering, suggest improvements for clarity, and ensure that it works seamlessly with your accounting system. An accountant’s expertise provides peace of mind, ensuring your COA meets industry standards and best practices while providing a clearer picture of your financial health.

Example: Outsource your accounting to a team of experts (like those at Qbix) who can create and maintain your chart of accounts for you (and much more).

By establishing and maintaining a well-designed chart of accounts, organizations can enhance their financial management, transparency, and accountability. This foundational element of accounting systems supports accurate reporting, informed decision-making, and effective oversight, ultimately contributing to the organization’s success. Schedule your free consultation with the Qbix team today for a complete accounting systems review. You’ll be glad you did.

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