4. Add your Chart of Accounts

ByAbby

Your Chart of Accounts is the backbone of your accounting system. These are the categories where you track income and expenses for the Statement of Activity, and bank accounts and other assets, liabilities, and net assets for the Statement of Financial Position. Don’t worry if you don’t know what all that is yet. Just know that these reports are the final outcome of the bookkeeping process, that they are reports you, your board, your funders, and other interested parties will want to see, and that they are derived from the chart of accounts.

In the sections below, I’ve provided some directions for developing a chart of accounts (COA) and two different methods for getting the COA into QBO. QBO does include a generic Nonprofit COA that you can use if you don’t have much information to develop your own COA from yet. Those instructions are provided in Method 2, but I recommend reading through this whole page to get a better understanding of the purpose and uses of the COA before jumping to the next section.

You’ll find that a COA has some basic elements, but is customizable for each organization depending on what they do and how they do it. A good understanding of the types of revenue and expenses your organization has, or is likely to have, whether you use accrual or cash accounting, and a good idea of how the organization is set up in general, will help you develop a starting COA that matches pretty well to the organization. I say a “starting” COA because it doesn’t have to be perfect right from the start. You can always add accounts that you think will be useful, or remove accounts that you don’t end up using.

Here are a few things to keep in mind when creating or editing a COA:

  • If you don’t have much accounting knowledge or experience, work with someone who does to help you develop or edit the COA. That way you won’t leave out anything important or set up accounts as the wrong type.
  • Remember, functional expenses (Admin / Fundraising / Program) are tracked by Classes in QBO, so don’t split up your COA by these categories.

Account Numbers

During setup, I suggested that you turn on the account numbers so that you can organize your chart of accounts, but this is optional and depends on your preference. The COA will be organized by account type, regardless of the numbers. If you then want to organize within the type (for example, having payroll costs show up on top, instead of wherever it lands alphabetically within the expenses section) then you will want to use numbers.

Another benefit of using numbers is that as you get more familiar with the numbering system, you’ll start memorizing the numbers for each account, and that will make your work go quicker. It’s a lot faster to start typing in a number to pull up the account than it is to type in account names.

The account numbers follow a general guide, but there’s no rule on exact numbers for specific accounts. That leaves you the flexibility to use the numbers for organization. Here’s a general rule to follow when numbering accounts:

1000 – 1999 = Assets

2000 – 2999 = Liabilities

3000 – 3999 = Net Assets

4000 – 4999 = Revenue

5000 – 9999 = Expenses

This is a very basic example and is not all encompassing. Each organization will have a different COA depending on the method of accounting and the work they do. A COA is customizable, but there are some main types of accounts you need to have and some accounts that will make sense for most organizations. 

The account categories are in bold. These show the type of accounts that follow.

Accounts with a * are only needed for accrual accounting. If you use the cash accounting method, then you don’t need these. Accounts Payable and Accounts Receivable are a recommended exception. Technically, an organization using the cash method of accounting won’t track these. But you should keep them for two reasons:

  • QBO uses these accounts for certain types of transactions, like bills and pledges*. So they’re needed for the software to work as intended.
  • They can still be helpful for internal tracking of bills and pledges. When you run the reports on a cash basis, A/P and A/R aren’t included. But you can look at the vendor and customer accounts to see what’s outstanding, and you can pull a report on accrual basis to see it as an easy list.

A note on Parent and Child accounts: You will notice that some accounts are indented under another account. The first account is the Parent account and the account or accounts indented below it are the Child accounts. This is a great way to further organize your chart of accounts. Using Contributed Income as an example: Contributed Income is a parent account, and Individual Donations is a child account. When using parent and child accounts, do not categorize any transactions to the parent account. Only use the child accounts.

AssetsAssets are resources that your organization owns that have value.
Petty CashAny cash held outside of the bank. This can be temporarily out for things like events, or regularly out like a petty cash box in the office. If you have multiple Petty Cash boxes, make an account for each one
CheckingRegular checking account. If you have multiple accounts, make an account for each one.
SavingsIf you have multiple savings accounts, make an account for each one.
Accounts ReceivableThese are the amounts owed to you by others. QBO uses this account when a Pledge / Invoice is entered, so leave it as is, even if you are cash basis.
*Prepaid expensesThis is used in accrual accounting to record expenses, like insurance, that get paid in advance but cover a longer period of time.
*Fixed AssetsThis is where long-term assets get recorded.
*Accumulated DepreciationThis records how much of the fixed assets have been depreciated over time.
LiabilitiesLiabilities are what your organization owes to others.
Accounts PayableThis is payments that you owe to others. QBO uses this account when a Bill is entered.
*Deferred RevenueFor revenue collected but not yet earned. This can come into play with things like tickets and sponsorships to events, since these payments are generally received before the event takes place. Whether or not you use this account to record advance payments can depend on the wording to the purchaser, and whether or not it is refundable if the event gets cancelled.
*Payroll LiabilitiesThis is only applicable if you have anyone on payroll. These will come into play for payroll expenses incurred during one period but paid out in another. So if your payroll period ended in on 12/31 but the pay date isn’t until 1/5, you can record those payroll expenses in QBO by recording them in these payable accounts.
– *Wages Payable
– *Payroll Taxes Payable
Equity / Net AssetsThis section is still called Equity in QBO, but nonprofits don’t have Equity, they have Net Assets. Net Assets represent the difference between what a nonprofit organization owns (its assets) and what it owes (its liabilities). Don’t worry too much about the how of using these yet. Just make sure they’re included in your COA.
Net Assets WITH Donor restrictionsThis is where you will track the total amount of assets that are restricted. (Individual restricted grants and funds will be tracked in a different section of QBO.)
Net Assets WITHOUT Donor RestrictionsThis is the rest of your net assets that are unrestricted. (Tip: Rename the Retained Earnings account. This will reduce the number of journal entries you have to enter to track this.)
RevenueRevenue is the money your organization earns or receives as donations or grants.
Contributed incomeContributed income is any income provided freely by the donor without expectation of receiving goods or services in exchange.
– Individual Donations
– Corporate Donations
– Foundation / Non Profit Donations
– Government grants
In-Kind DonationsIn-kind donations are non-cash contributions of goods or services that the organization needs to operate and achieve its mission.
– Goods
– Services
Earned incomeEarned Income is the revenue generated from activities that are directly related to the organization’s mission and services. Unlike donations and grants, earned income comes from the sale of goods, services, or other activities for which the nonprofit charges a fee. If you only receive income from donations and grants, you won’t need this distinction.
– Program fees and ticket salesDepending on the programs you offer, you may need more than just one account to track the different types of program fees you collect. But don’t forget to differentiate between different programs using Classes – not the COA.
Merchandise salesIf you sell merchandise, like in a gift shop, at events, or online, record those sales here.
Other income
– Interest incomeIf you have a savings account, or other basic interest earning account, record the interest here.
– Miscellaneous incomeThis is best used rarely to never. But it’s nice to have this account available for really random income that doesn’t fit anywhere else.
ExpensesExpenses are the costs your organization incurs to operate. The following Expense accounts are pretty self-explanatory, so I don’t include a lot of descriptions. They can also be up for interpretation. For example, does a subscription to Microsoft Office go to office expenses, or subscriptions? Where you categorize it can depend partly on how you budget at the beginning of the year. Consistency is key though. If you start off categorizing it as subscriptions, try not to switch over to office expenses later.
Payroll ExpensesThis is only needed if you have payroll.
– Wages
– Payroll Taxes
– Benefits
Professional ServicesIf you are paying an individual or business for services provided, record those payments in one of these accounts. Keeping these separate from other expenses will make your life so much easier at year end when you have to issue 1099s.
– Accounting Services
– Legal Services
– Other Contract Services
Advertising & Promotions
Supplies
Office Expense
Printing & Copying
Postage & Delivery
Registration/Dues & Subscriptions
Insurance
Travel, Meals, and Entertainment
Professional Development
Bank and Merchant Fees
Occupancy expenses
– Rent
– Utilities
Depreciation Expense
Other Expenses
– Miscellaneous ExpenseThis is best used rarely to never. But it’s nice to have this account available for really random expenses that don’t fit anywhere else.

Once you have your COA ready, use either of the two methods below to add it to QBO. If you are going to try using the QBO default COA, then use Method 2.

When you set up QBO and choose the Nonprofit entity type, QBO will load a default COA. This method will ignore that COA and replace it with your own.

I highly recommend using account numbers for this method. This will help you clean up the extra default accounts from QBO after you import yours.

Navigation: Gear Icon > Chart of accounts
Navigation: Arrow next to New > Import
Download the Sample
Open and update the Sample file

The sample files is an Excel sheet. It can also be opened in Google Sheets if you don’t have Excel.

Remove the existing info and update it with your chart of accounts.

If you’re unsure of the correct Type and Detail Type names, you can view the list in QBO by going back to the Chart of Accounts page, and clicking New, as if you will be making a new account.

To find the Type options

Choose the category at the top, and then find the applicable account in the “Save Account Under*” menu. These are the Type names. You’ll choose from the names all the way to the left. Don’t choose an indented option, because that is an account rather than a type. Copy the name into the spreadsheet.

To find the Detail Type options

The Detail Type comes from the list under Tax Form Section. Choose the applicable one and copy the name into the spreadsheet. What you choose here doesn’t actually matter. It’s silly. The only thing you might need to keep in mind is that a subaccount has to be the same tax form section as the parent account. Other than that, it makes no difference to anyone or anything which section you choose. So just choose the one that makes the most sense to you.

Don’t worry too much about getting Types and Detail Types exactly right when filling out the spreadsheet. If you make a mistake and the Type or Detail Type don’t match the QBO options, you’ll get a chance to add those in later. You can even leave them blank and add them in after you upload.

Upload the spreadsheet

Go back to the import screen and upload the completed spreadsheet.

Map the Fields

If you used the example sheet, then this will already match up and you can go to the next step.

Make any necessary adjustments

Fields that can’t be uploaded as is will be highlighted in red.

In this example, I just reuploaded what they had in their sample sheet, so you will have many more rows than this. If you entered everything completely and correctly in the spreadsheet, you won’t have to edit anything and can move on to the next step.

Deselect unwanted lines

You can use the checkbox to exclude certain lines from uploading.

Update Type and Detail Type

If the names in your spreadsheet don’t match the QBO names exactly, then these need to be updated using the dropdown options. This is also where you will select the type and detail type, if you left those blank in the sheet.

Click Import

Once everything looks good, click Import. The COA page will reload and you’ll see all your new accounts there.

Turn accounts into subaccounts

If you want any accounts to be subaccounts, you’ll have to update them individually after you import. Do this by selecting the down arrow all the way to the right, then edit, on the account you want to be a subaccount.

Choose parent account

Under Save Account Under*, choose the account you want to be the parent account. In this example, we’re putting Fuel under Automobile.

You can see that Fuel is now a subaccount of automobile.

Remove Extra Accounts

Once you’ve finished updating the accounts you plan to keep, you will be left with a number of accounts that you aren’t going to use. You can’t delete accounts in QBO. Instead, you will inactivate them. This will hide them so that they won’t be used in the future.

If you used account numbers in your import, you can choose all the accounts without numbers to inactivate.

Choose the accounts you want to inactivate by clicking the checkbox to the left of each account.

Navigation: Batch Actions > Make Inactive

Confirm to inactivate.

Some accounts won’t inactivate.

If you get this message that some accounts couldn’t be made inactive, that’s ok. This is usually because they’re being used in the Items list (which we will update later) or in some other function of QBO. Once you update Items, you can come back and try again. If you can’t figure out why the account won’t inactivate, don’t worry about it. It won’t hurt anything being there if you don’t use it. This is another scenario where account numbers can come in handy – if you only use your accounts with the account numbers, then any extra accounts won’t show up on reports and won’t matter.

When you set up QBO and choose the Nonprofit entity type, QBO will load a default COA that is already customized for a nonprofit rather than a for-profit entity. Because each organization is unique, the default is unlikely to work as-is for any organization, so will probably need some adjusting. This may be a good option for a brand new organization. You can even try out the COA as is and see what accounts make sense for your org as you go along. If you’re going to be changing more than just a few accounts though, I would recommend importing the COA.

Navigation: Gear Icon > Chart of accounts
Navigation: Settings

Click the smaller gear icon on the Chart of Accounts page.

Increase page size.

This way you can see the whole COA.

Navigation: Batch Edit

This will allow you to change the account numbers and names without editing each one individually.

Quick note: I’ve had QBO be a little wonky about this and freeze up when I try to update the whole page at once. I recommend doing a few at a time and saving in between.

Add account numbers and update names

You only need to add account numbers if you choose to use them and only need to update the name if needed.

If you’re unsure on whether to add numbers here or not, read through the section above on developing a chart of accounts for more information.

Revenue example

As an example, here is how I updated revenue accounts with their numbers and changed their names for clarity. Most accounts won’t need to be changed this much though. These changes are just based on preference and what I see more often with my clients. You may find that these don’t quite make sense for your organization, and you can leave them as is, change them to something else, or add others if needed.

  • Corporate and Foundation grants = Corporate Donations
  • Donations Directed by Individuals = Individual Donations
    • To me, the “directed” makes this sound like these are donations with restrictions set by the donors, and we’re not tracking that here. For the COA we just want to know that these are donations from individuals, regardless of reason or restriction.
  • Grants from other Nonprofits = Foundation / Nonprofit Donations
    • I moved foundations here because foundations are also nonprofits. You can also just call this Grants. Again, specific wording is your preference and based on the activity your org is most likely to see and want to track.
  • Government Grants and Contracts – I left this as is.
Contributed Income revenue accounts with suggested changes
Tip: Change Retained Earnings to Net Assets Without Restrictions

Change the name of your Retained Earnings account to Net Assets Without Restrictions.

There are some use cases where this won’t work. For example, if you are tracking board designated funds in the equity section, (which are different from restricted funds) then this won’t work because you can’t add a sub-account to the retained earnings account, even if you change the name. But that is a less likely situation and is a whole separate discussion. Just know that doing this will work great and simplify your life, in most cases. If it turns out it won’t work in your case later, then you can always change it back.

Add new accounts, if needed

There will almost certainly be some accounts that you need to add to the default COA.

In this example, I’ll be adding one of the In-Kind sub-accounts. Review the example COA in the section above for more info on the in-kind accounts.

Navigation: New
Choose category in Save account under

In this case, I chose the In-Kind donations account because I want it to be a subaccount of 4100 In-Kind donations. What you choose will depend on the type of account you’re adding and whether you want it to be a sub-account.

Add details

Add the account name and number. You can include a description if you wish.

If this isn’t a sub-account, you’ll also have to choose the tax form section. The tax form section does not matter. It’s silly. The only thing you might need to keep in mind is that a subaccount has to be the same tax form section as the parent account. Other than that, it makes no difference to anyone or anything which section you choose. So just choose the one that makes the most sense to you.

Remove Extra Accounts

Once you’ve finished updating the accounts you plan to keep, you will be left with a number of accounts that you aren’t going to use. You can’t delete accounts in QBO. Instead, you will inactivate them. This will hide them so that they won’t be used in the future.

Choose the accounts you want to inactivate by clicking the checkbox to the left of each account.

Navigation: Batch Actions > Make Inactive

Confirm to inactivate.

Some accounts won’t inactivate.

If you get this message that some accounts couldn’t be made inactive, that’s ok. This is usually because they’re being used in the Items list (which we will update later) or in some other function of QBO. Once you update Items, you can come back and try again. If you can’t figure out why the account won’t inactivate, don’t worry about it. It won’t hurt anything being there if you don’t use it. This is another scenario where account numbers can come in handy – if you only use your accounts with the account numbers, then any extra accounts won’t show up on reports and won’t matter.

Next Step – 5. Set up your Products and Services list
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