Does Your Chart of Accounts Make the Grade?

Blog
September 16, 2016

Chart of Accounts (COA) comprise the basic structure used to record the financial effects of transactions. They should store, categorize, structure, and segregate transactional data for supporting financial and management reporting. It serves as the basis for the fiscal administration of your exempt organization’s funds, programs, projects, and activities. If well-designed, Chart of Accounts provide an understanding of your financial health by grouping the accounts that define each class of items for which money is spent or received, and by organizing finances and segregating expenditures, revenue, assets and liabilities

Overhauling your organization’s COA is an opportunity to find new efficiencies in your accounting practices. As a new organization, you likely used the industry default COA when first setting-up the financial system. While the standard may have worked in the initial stages of operation, exempt organizations require more robust reporting. In addition to outgrowing your current structure, other common reasons for a COA change are:

  • New financial system implementation
  • Functional limitations of existing Chart of Accounts
  • Current GL is out-of-date and overly complex
  • COA is out-of-sync with regulatory environment (i.e. compliance under indirect cost rate agreements)
  • Limited scalability to support organizational restructures
  • Time is wasted manipulating data in spreadsheets to create relevant financial reports

By overhauling your COA, your exempt organization gains transparency, consistency, and accountability. A new Chart of Accounts offers:

  • Improved data quality
  • Informed decision-making from clear financial reporting
  • Reduced ad hoc spreadsheets
  • Enhanced consolidated or program level reporting

The COA should be built from consistent definitions for business attributes and data elements. Any redesign should be a collaborative approach driven by vital financial personnel with input from key stakeholders. First, you’ll want to conduct an analysis of the current state of affairs. Considerations as to keep or discontinue certain items within your Chart of Accounts include:

  • How often is the account used?
  • What is the need for the account?
  • How material are the transactions in the account?

After the initial study, interview your information stakeholders (i.e. budgeting, development, program managers and board members) to understand their pain points. Start by asking who needs what information and how? Keep in mind that not every answer can be found in a COA redesign.

Next, determine your new account number structure. Two popular options are a linear structure or a multi-dimensional structure. Linear structures use a limited number of fields, for example: xxxx-xx (account – object code). Multi-dimensional structures are made up of multiple fields that typically record a different element of information about a transaction, for example: xxx-xxx-xxx-xx-xx (fund – organization – project – activity – object). Many exempt organizations use Quickbooks, which requires a linear format of up to 7 digits for an account number; although, there are some workarounds using class lists for separate reporting purposes.

When planning your redesign, don’t forget the future! It is important to evaluate growth and its potential impact on future reporting requirements.

If your organization is considering a Chart of Accounts makeover, or has already started the process, and would like to discuss possible approaches, please contact us for more information.

INTERESTED IN LEARNING MORE?

For more information, please contact Aronson Nonprofit and Industry Association Group Manager Melissa Musser, CPA, CISA, at mmusser@aronsonllc.com or 240.364.2598.