The nonprofit chart of accounts tracks revenue and expenses and is the heart of every nonprofit accounting system. For-profit businesses have one bottom line — making a profit. Nonprofits have two bottom lines: fulfilling its mission and having the necessary funding to accomplish this.
Both nonprofit and for-profit businesses often use Quickbooks as an inexpensive, off-the-shelf accounting solution. While Quickbooks handles many generic accounting tasks, it is not designed for true fund accounting. Questions frequently come up about how Quickbooks handles the nonprofit chart of accounts. In this blog post, we explore a complex question as it relates to functional accounting and segregating expenses using Quickbooks.
Editor’s Note: The following questions and answers represent real world challenges nonprofits encounter managing nonprofit accounting everyday tasks. Our advisor column is intended to provide basic advice on questions related to the topic. Answers to these questions are simply the view and opinion of our nonprofit accounting pros. Nonprofit Accounting Pro shall not be liable, answerable or accountable for any loss or damage resulting from the advice given by our advisor.
Managing Nonprofit Chart of Accounts in Quickbooks
Answer: If you are using Classes in QuickBooks to segregate your functional expenses for your Mission based Programs, and your Support Services for Management and General and Fundraising, you do not need to have parent expense accounts in your nonprofit chart of accounts for Program and Fund Raising, since the Classes will segregate the expenses for you.
Most consultants recommend using classes in Quickbooks to get the segregation financial activity a nonprofit needs for funds, functional areas, programs, funding sources, etc.
In QuickBooks, you get two data elements for coding and this severely limits reporting. You have Account and Class. Jobs is a third data element, but is not universally available in the QuickBooks report structure. If a nonprofit requires reporting on more than two dimensions, QuickBooks simply can’t handle it and a majority of financial reporting must be done outside the system in spreadsheets, which can create internal control deficiencies.
Limitations for Fund Tracking in Quickbooks
The following excerpt was taken from the Intuit Quickbooks Support Site:
Here is a snippet from the book Running Quickbooks in Nonprofits, by Kathy Ivens.
What About Quickbooks for Nonprofits?
Intuit introduced QuickBooks for Nonprofits as part of attempt to attract specific vertical market users. The problem is the underlying product is the same as the regular version of QuickBooks. The only difference is customers are called donors, sales receipts are called donor receipts and invoices are called pledges. They didn’t even change the name of the Equity accounts to Net Assets, or Fund Balances.
You cannot generate ASU 2016-14 compliant reports in QuickBooks and must export your data into spreadsheets to formulate your financial statements by fund and functional area. The main problem is QuickBooks does not have a segmented nonprofit chart of accounts that allows you to segregate your activity by fund, functional area, programs, grants, sites, funding sources, etc.
A nonprofit exists to perform specific services and programs, as stated in their mission. The purpose of functional accounting is to present the nonprofit organization’s major types of activities, primarily program or mission-based services and supporting services such as administration, governance and fundraising.
Breaking Down Expenses by Functional Area
Breaking down expenses by functional area reflects the broad outlines of major nonprofit reporting requirements as outlined in SFAS-117 and for filing the IRS Form 990, which requires nonprofits to divide expenses by program, management and general and fundraising. For any organization that undergoes an annual audit, their financial statements must be presented by functional area, or the CPA will be required to qualify their opinion, stating the statements were not prepared in accordance with generally accepted accounting principles.
Tracking Real Costs of Programs
Besides the regulatory requirements of reporting by functional area, the most important reason to report on functional expenses is it is an ideal method for tracking the real costs of program and supporting activities, making it an invaluable tool for decision-making. It allows you to see exactly what each of your individual programs is costing, whether your fund raising is proportionate to the areas that need it, and whether you or not a specific program is sustainable.
As a subsidiary report to your financial statements, the Statement of Functional Expenses is a detailed list of the nature of each expense (salaries, payroll taxes, rent, professional services) by functional area. This report is necessary also when comparing actual expenses to budgets in each of your functional areas.
What is Functional Accounting
Functional accounting allows you to identify three elements of each expense. First, who is paying for the expense, i.e. a specific grant, donor. Second, what the expense is for such as payroll, rent or supplies. Third and most importantly, why was the expense incurred for programs, or support services.
By integrating these elements into your accounting system, the easier it will be to generate more accurate and relevant financial statements both internally and externally. This will make it easier to report on each of your organization’s programs and determine which programs are running efficiently and effectively. A detailed functional report will provide management with the information needed to make more informed decisions on your organization’s financial health. If your current accounting system cannot generate functional reports by program and support services, and by funding source, then should consider evaluating your present system and investing in an upgrade of your financial software.
Benefits of a True Nonprofit Accounting System
For real time, reliable tracking of revenue and expenses, a nonprofit can benefit from an accounting system that separately tracks transactions for a program, funding source, department, grant, project or functional area.
The following checklist can determine whether you need a true nonprofit fund accounting system:
- Do you have certain funds that you must spend in accordance with specific restrictions — in certain ways or for certain purposes?
- Is you organization the recipient of on or more grants?
- Do you need to measure the performance of a specific program, activity, or performance by location?
- Do you need to report to donors and funding sources how you spend their funds?
- Do you have to tract and report the ratio of overhead to program usage?
If you answered “yes” to any of these questions, you need an accounting solution designed to handle specialized not-for-profit accounting requirements. FastFund Accounting gives your organization the ability to report on revenue and expenses for each fund separately. It automatically closes each fund’s excess or deficiency to its respective fund (net asset) balance. With FastFund Accounting, budgets are tracked by program, department or functional area.
Trying to achieve nonprofit accounting functionality using commercial, off-the-shelf packages like Quickbooks can be inefficient, non-compliant and cumbersome to maintain. Using accounting software designed for nonprofits, such as FastFund Accounting, will help you reduce audit fees and remain compliant and accountable to funding sources.
We hope our answers provide clarification. We welcome your questions and feedback. Feel free to comment below.