Chart of Accounts: Less is More
Nonprofit and governmental accounting can be complex. One way to simplify your accounting process is to have fewer funds and accounts. A cumbersome chart of accounts can lead to more work, from needing to group the transactions within the accounts as well as to read/understand the accompanying financial statements.
In any industry, understanding your organization’s accounting process and the internal components of the system is important. Understanding the requirements of your industry is necessary to know what can be changed and what is required by the parties to which you report and must comply. One common misconception is that organizations need separate bank accounts to account for monies with different restrictions. Granting agencies or debtors may require funds to be held separately in certain situations. However, generally software capabilities allow for designations/restrictions on funds to be tracked without requiring separate bank accounts. This prevents the accountant from having extra monthly bank reconciliations to perform.
Do you see accounts in your chart of accounts you didn’t know existed or you don’t know the purpose? This is not uncommon. Often organizations create a new account and then rarely post transactions to the account. When creating accounts, consider how much or how little detail the reviewers of the financial statements may want or need to see. For example, does the board of directors need to see the detailed utility account balances each month (phone, electricity, water, garbage, etc.) or will one utilities line item allow them to make informed decisions for the organization?
Think of your organization’s accounting as shelves and storage bins in a warehouse. You can view the shelves as your funds and the bins on each shelf as your accounts. If you don’t have bins or shelves, then all you have are single items located across the warehouse. It would take extra time to look for and find exact items. It would be much simpler to have shelves and bins to put similar items in so they can be easily tracked or retrieved.
If you have not reviewed your chart of accounts recently, consider doing so at least annually. During the budgeting process for next year, it may be a great opportunity to review the chart of accounts. Spending the time to clean up/condense accounts where possible will allow for monthly financial statements that are easier for board members and other users to read.
Governmental entities must also adhere to the requirements of Governmental Accounting Standards Board Statement No. 54, which dictates the conditions for when separate funds must be established or whether the activity should be grouped in an existing fund.
If you feel as though your accounting funds and accounts exceed the necessary amount and could use some optimization, please contact your Ketel Thorstenson advisor for guidance in this area.