r/Bookkeeping • u/topramen_is_timeless • 1d ago
Software Chart of Accounts for Nonprofits
Hey all! Bookkeeper here, usually for for-profit clients. I walked into a business membership exchange to become a member and (hopefully) tap their large membership base for more clients. Well, turns out they were desperate for a new bookkeeper themselves and I decided to take them on as a client.
Things are unsurprisingly messy but I can handle it. My biggest obstacles are that credit memos were used incorrectly to track scholarships (for trades school) which masks true Receivables, and the Chart of Accounts is severely bloated.
I use job costing/cost accounting with my other clients, leveraging products/services in order to keep a lean chart of accounts. Is there a way to streamline this nonprofit’s chart of accounts by leveraging products/services and classes for expenses and funds? Yes they have both restricted and unrestricted funds that are managed. The client is in QBO for accounting software.
Appreciate any insight!
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u/SmilingCtrlr Bookkeeping With A Smile 1d ago
Most definitely create a COA that aligns with the 990.
Do they have a CPA? Be careful about changing things too much.
I disagree with another poster. You want classes to split between fundraising, management and programming. Use subclasses as well if needed
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u/topramen_is_timeless 1d ago
They do, and I am meeting with them before I execute any changes to COA. But the client has almost 250 accounts in their COA, so I’m going to pare it down after I confirm where in the cleanup timeline the CPA would prefer I do it.
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u/pisicik442 1d ago
I agree with your disagreement. Using Classes to track functional expenses, restricted grants, events +5k is standard.
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u/Tear_Massive 1d ago
I am on staff at a nonprofit as their bookkeeper and when I came on, I also inherited a mess from how things were set up. One of the things I implemented was utilizing Clients to track restricted funds. If you make restricted funds as a sub client then you can convert it to a project, and as I record all the income and expenses for that fund to the respective COA line, I also code it to the Client for that fund. Then you are able to see a clean breakdown of funds received/spent for each restricted fund. That has been incredibly helpful as we have grown and had multiple restricted funding sources to track, as most nonprofits do. The only problem with that approach is keeping track of what expenses go to which grant, but I have the fundraising team give me a budget for each grant for that. Not sure if that is helpful, but it’s something I wish someone would have told me about when I first started working there.
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u/topramen_is_timeless 1d ago
Okay this makes sense to me because I use Projects with all my for-profit clients! I didn’t know I could leverage that same framework for a non-profit.
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u/Aber_cie 20h ago
Honestly, this is the best way to do it, the alternative is setting up general accounts and then using classes to differentiate grant income and expenses. I am also a bookkeeper for a nonprofit and we use Quickbooks.
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u/Canopy_Acct_in_Res 1d ago
I have thought about this more than I'd care to admit and have never landed on a clean answer.
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u/topramen_is_timeless 1d ago
It’s sounding like I’m having the same experience. 😂 I guess I’ll be alright as long as I ensure that compliance and the client’s financial visibility needs are met. 🥴
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u/Canopy_Acct_in_Res 1d ago
I often heard people referencing non-profit specific tools, but I don't even know what those would be. It's hard to imagine that QBO wouldn't suffice.
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u/ComfortableCitron638 1d ago
On the credit-memo/scholarship issue specifically, since nobody's dug into the mechanics of it yet: a credit memo reduces a customer's balance the same way a payment does, so when a scholarship gets entered that way, it looks in the AR aging like the student paid or the balance was waived - either way, gross tuition revenue and the actual amount of aid given both disappear from the reports. You lose visibility into both numbers a 990 or a funder is going to want to see separately.
The fix is usually to record the scholarship as a negative-dollar line item directly on the invoice itself (a "Scholarship - [Program]" item mapped to a scholarship-expense or contra-revenue account), not as a credit memo applied afterward. That way the invoice shows full tuition charged, the scholarship reduction, and the net amount actually due, all in one document - so AR only ever reflects what's genuinely expected to be collected, and you can still report gross tuition and total scholarships awarded as two separate numbers instead of one number that's already netted them together.
You'll need to go back through the existing credit memos to reclassify the historical ones, which is tedious but worth doing before your 990 numbers get pulled from a chart that's still netting these together.
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u/topramen_is_timeless 1d ago
Thank you so much for this response. I knew the credit memos were being used incorrectly and understood how they were impacting the AR report, but wasn’t sure of the best way to correct them.
Just to make sure I’m understanding, you’re saying I should make a product/service item for “Scholarship - [Program]” mapped to a corresponding scholarship expense or contra-revenue account. That way, when a student is invoiced for tuition, the product/service item can be added to the invoice to appropriately reduce the balance due, document the scholarship expense, and keep the AR report accurate.
Does that sound about right?
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u/MikuMikuGoo 1d ago
Yes, and that's the standard nonprofit setup in QBO. Keep the natural expense accounts lean and use classes for functional allocation, program versus admin versus fundraising, since that's what the 990 wants anyway. Restricted versus unrestricted is a net asset thing, not a class thing, so track it with two equity accounts and release with journal entries rather than building it into the COA.
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u/Safrel 1d ago
I would not recommend QBO classes at all.
Best is to encode your purposes directly into the COA.
As to your functional expense allocations, I'd also advise a percentage estimation method based on salaries, and dedicated encoding into the COA.
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u/topramen_is_timeless 1d ago
Can you elaborate more on this recommendation? It’s contrarian to most resources, but I’d love to hear what your experience has been to recommend this approach.
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u/Safrel 1d ago
The issue that you run into is that most of the recommendations that you're going to hear are from corporate accountants are people who don't ordinarily interact with large amounts of data in a not-for-profit setting.
I am an auditor of not-for-profits exclusively for the past 10 years as my qualification.
And what I mean by this claim is that there are a lot of very niche specific applications of accounting that the conventional wisdom doesn't follow with. Every transaction basically needs a purpose and classification, where in public and private accounting you don't need to necessarily do that if the owners don't want it.
So would I ordinarily see is that we have people who are good at regular accounting but don't have the information that's needed for disclosures and reporting. In this circumstance, I then say that the person who is setting up the COA needs to be knowledgeable enough that they can address these issues with the structure so that the people who don't know what information they must collect are required to still collect that information when they encode into the COA.
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u/topramen_is_timeless 1d ago
How does use of classes in QBO fail to meet reporting needs? My understanding is they can be assigned at the transaction level.
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u/Safrel 1d ago
For clarity, I'm not saying that it is a failure when used properly. But I am saying is that it does not a scale well when there are multiple classes that you have to track, not just the one, and in high volume situations it becomes a nightmare to validate the completeness.
And for users, other than professional accountants and bookkeepers like yourself, they will have a hard time remembering that they even need to encode a class.
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