(originally published 10.19.2005)
This Week’s Question:
How do we set up a basic accounting system for our organization? We’re new to starting an organization, and not quite sure where to start.
This Week’s Answer:
When most people start an organization the last thing they really want to think about is what is their accounting system will look like.
However, you should!
It is much easier to design a useful accounting system at the beginning of the process rather than somewhere in the middle.
While an accounting system can be a fairly complex beast, they can start out relatively simple.
The first step is to set up a basic “chart of accounts” – a numerical way of categorizing your income, expenses, assets and liabilities. Think of the chart of accounts as the table of contents to your accounting system.
Here’s how to set up a chart of accounts in four easy steps:
1. Decide on your activity centers
2. Choose your income and expense lines
3. List your asset and liability lines
4. Put steps 1 – 3 together and create a chart of accounts
Let’s look at each step in more detail.
Step 1: Decide on your activity centers.
For starters, what does your organization do? What are your program areas? These are the top two questions to ask when determining your activity centers.
The activity center – sometimes referred to as a “cost center” – consists of your organization’s programs (or lines of business), as well as fundraising and administration.
You’ll eventually use your activity centers to print out financial statements for each activity and assess its financial impact on your organizations. So, you’ll want to consider what level of detail you will want to see later.
Most new organizations tend to have three or four program activity centers, for example:
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You will also want to have a common cost activity center. This is where you will put expenses that are associated with all your organization’s activities, such as rent, phone and utilities. Speaking of expenses...
Step 2: Choose your income and expense lines.
This means considering: what categories of expense do you want? Many organizations have the typical payroll, benefits, payroll taxes, phone, rent, utilities and supplies, but also think about any particular lines that might make sense for your organization, for example:
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On the income side, you’ll need two sections – one for contributed income and another for earned revenue. “Contributed income” includes individual donations, special events and foundation grants. “Earned revenue” includes fee for service work and reimbursable government contracts.
Step 3: List your asset and liability lines.
Most people are concerned with their income and expenses, but don’t forget about those things you own... and, unfortunately, those things you owe. In accounting terms, these are your assets and liabilities.
You will want to have a list of your assets including cash, investments or any deposits you might have paid. Does someone owe you money? That is an account receivable in accounting and should be listed as well. Also, don’t forget your computers and furniture.
The other list you need to make is that which you owe. Unpaid bills and such are liabilities and they are classified in accounts payable. Also, if you have a line of credit or any other debt, it would be listed here.
The last piece to include here is your net assets. In the for-profit world this is called “equity.” Net assets represent the net worth of the organization. Think of it as buying a house. If you buy a house for $500,000 and have a $400,000 mortgage, your assets would be $500,000 your liability would be $400,000 and your net assets would be $100,000. You’ll want a line for net assets as well.
Step 4: Put steps 1 – 3 together and create a chart of accounts.
The chart of accounts is the road map for your organization’s accounting system. Like any map, you need a legend – and in this case your legend is comprised of your activity centers and line items – income, expense, assets, liabilities and net assets.
An example of a version of the unified chart of accounts can be found online at: http://nccsdataweb.urban.org/FAQ/index.php?category=77
So, the account code will look like: AA – BBBB where A is the Activity Center and B is the specific line item.
Once you have your chart of accounts set up you’re ready to put in your opening balance and start entering your transactions! Although this involves double entry bookkeeping, a good computer program can take care of most of this.
Once you’re ready to get started, the following resources can help you create and implement your accounting system.
Once you have your basic accounting system set up, all you need to do is get some money to put into those accounts!
NPC Note: The following links offer more information about setting up a chart of accounts, and other accounting basics:
Nonprofit: Chart of Accounts (questions, issues)
(QuickBooks Community)
financial management: Templates and Samples
(Minnesota Council of Nonprofits)
Accounting
(idealist.org)
Basic Overview of U.S. Nonprofit Financial Management
(managementhelp.org)
For more administrative resources, please visit Tools You Can Use: Finance, HR, and Admin.
