Speaker 1: If you have a million accounts that show up on your financial statements, Houston we have a problem. Now I know there's this urge to want to pile everything up onto the financial statements because you want to make sure that you're capturing everything. You also want to make sure that you're telling your organization's story and that it speaks through the financials, right? You want to make sure that you're being transparent. And I get all of those things. And all of those things are important, but there is a time and a place for everything. And so in today's video, I'm going to be going over five sections that your chart of accounts needs. And we're actually going to be going into detail. And I'm actually going to show you an example once we get down to the last two sections, because that's usually where I see the bulk of the problems. I'm going to show you some do's and some don'ts so that you have a clear example of what you should and shouldn't do. Now let's get started. So what is the chart of accounts exactly? The chart of accounts is a guide that you use to categorize the different transactions that flow in and out of your organization. It is also what determines how things show up on your financial statements. So when I am looking at your statement of activities, for example, the accounts that show up there are going to be what sits in the chart of accounts. And that's why it is very important to outline the chart of accounts correctly so that one, your financial statements aren't crowded, but that it does speak to the organization, how you guys operate, where you're spending your funds, where you are receiving funds from. But we don't want to be too specific, right? So let's get into the first section. And the first section is going to be your net assets. And this really just describes or let the user of the financial statement know what the organization is worth. And there are typically two accounts here, and that's going to be your net assets with donor restriction and your net assets without donor restriction. And the reason that this is important is because typically when someone is looking at your financial statements, they want to know how much of those assets is directed, right, by a donor or a funder or a grantor, right, whoever is giving you funding, right. It also speaks to how much you have that you can determine where it gets put, right. So those funding that you receive without restrictions, right, your organization is able to use, you know, at will, right, or as you deem fit. But those with restrictions, you have to stick to how the donor directed it. And so a lot of times, right, users of the financial statements want to know what sits in those two buckets. A huge issue I see with this section of the statement of financial position is that there isn't one, right. I see an equity section, which is what for profits show on their statement of financial position, really their balance sheet, right, because balance sheets are what for profits call it, and the nonprofit space is called the statement of financial position, right. So now that we got that squared away, right, I see an equity section, and that's an immediate red flag to me. But what's a double red flag to me is when I look at that section, and I'm seeing things like owners pay, right. So we know in the nonprofit space, there are no owners, right? No one owns the nonprofit, right? It is something that is put together to serve to serve the public, right. And so even when you are investing and putting money into this organization, this is not deemed owners pay. And so you want to be very careful how you categorize and classify things. Because if you aren't aware of the verbiage being used, if you aren't aware of the definition, right, you could be saying your organization is doing something that really one isn't doing. But also it raises question to those who know what they're looking for when they're looking at your financial statements. So that's the net assets section. Remember, two accounts, that's your net assets with donor restrictions and your net assets without the second section is going to be your assets. And this is what your organization owns, right? So we're talking about things like your cash, right? We're talking about pledges receivable, we're talking about accounts receivable, we're talking about prepaid expenses. So what does the organization own? If you own something, right? If it's an asset, I'm expecting to see it on that statement of financial position under the asset section. And I think the main thing you want to look out for here is being very clear on what belongs in the asset section and what belongs in the liability section, which is the third section that we're going to get into now. So the third section is liabilities. And this is what your organization owes, right? So we're talking about things like your payables or those those bills, right, that you have incurred, but maybe you didn't pay yet. We're talking about loans here, we're talking about deferred or unearned revenue. For those of you that are contracting with the government, or you get multi year grants, right that you maybe have to perform before you receive, right? It's a liability at that stage, right? Or those of you who contract with the government, you take an advance against those funds. It's a liability because the government agency is expecting to recoup those funds. And so that is an error that I often see is that we have these advances, right that we know have to get paid back, but they show up nowhere on the statement of financial position. It belongs there and it belongs under liabilities. Now we're going to move into the fourth and fifth section. And this is where it gets good. And this is where I see the most errors. And this is what typically is the culprit of overcrowding, right, when we're trying to put too many things and be too specific in the revenue and expense area. And so I'm actually going to take you to my screen because I really want to walk you through this and show you an example because I think speaking about it is not going to do it enough justice. And so let's head over to the screen. Okay, now here we are going to walk through revenue. Again, as a reminder, we only need natural categories, right? We are not looking for all of these specifics. And I figured I can show you better than I can tell you. So here's an example. So on column A, we have an example of what you do. Column C, we have an example of what you don't want to do. So let's talk this through. So when I say you want to keep things simple and natural, you'll see over here we have contributed income as a master account. And then you have all of these accounts here, which would be considered sub-accounts. So let's dive into this line because this is a good example of what to do and not do, right? So essentially, let's just say you've got, let's see, how many of this is over here? There's six. You have six lines over here for foundation grants, right? What you would be doing, right, which would be the correct way to handle this is that all six of those foundation grants should live in this line called corporate and foundation grants. We should just be able to see the total when looking at your statement of activities that falls within this line, right? What I often see, which really isn't a great way to do this, is that you have foundation grants as your master account, but then you have each individual grant showing up as a sub-account. So instead of just the one line here, right, showing up on the statement of activities, I'm getting all six of these. So as you can imagine, that can begin to become very detailed as the time goes on and you're doing this for all different types of funding streams, right? So this is not to say that you don't want to know who gave you the grant, right? We absolutely want that detail, but we just don't track it in this way. And that's why I say it's very important to know how you're going to be using QuickBooks online, because there are certain ways you set things up to get what you need, right, for both management and for external users of the financial statements. And so as we wrap up this income piece here, we want to keep it very simple. We want to keep it very natural, right? And so if we were in the accounting software, for example, I should be able to, I would have been able to, let's say, double click, right, into here. And then it would have shown me, right, all of this once I went into it, but I wouldn't have seen all of this detail, right, on that actual statement of activity, right? That is just too much detail. So we're already here. So we're going to move into the expenses. This is the fifth and final section, right? And so the thing to note here is that you're going to have functional expenses and natural expenses. The chart of account is not the place for your functional expenses. And just as a recap, your functional expenses are those expenses that fall into admin, fundraising, and programs, right? So I think it's important to note that when you are categorizing expenses, you are choosing the natural category, but then you are also choosing the class in QuickBooks Online that it belongs to. What I often see, what you'll see in this don't column, is that organizations will try to classify the functional expense and the natural expense all at the same time in the chart of accounts, and then it becomes very convoluted, right? So here we're seeing admin dash salaries and wages, right? We don't need to see that level of detail. Or sometimes you'll see admin dash salaries and wages, and then you'll also see programs dash salaries and wages. No, no, no, no, no. What I want to see, how much do you have in total for salaries and wages? That is it, right? That's all I need to see, right? And if I needed to dig into the details and know what functional expense this fell into, then I need to run a P&L by class. But when I'm looking at the main chart of accounts, I don't need to see all of that detail. And then we go down and get even a little bit more into the details, right? So down here, we're looking at, for example, contract and professional fees. This is a master account, but then you have a sub-account for accounting, audit, fundraising, investment fees. But these are still all accounts that are not too detailed, right? These are accounts that are simplified. We can kind of tell by looking at the name what would fall in here, but nothing about looking at these accounts is telling us what functional expense it falls in. It's just telling us the natural category. So we have an idea of what the organization is actually spending their money on. When I look over here, this honestly gives me anxiety. Okay, guys? So let's look down here for an example, right? First of all, consulting salaries and wages is honestly doesn't make sense, right? Because if you are a consultant, then you're not an employee, which means you are not paid a salary, but that's neither here nor there. Let's get back to the topic at hand. Here we have it broken down where it says admin, right? So that means that the organization is trying to parse out that this belongs to the admin class. Again, this is something that we can show in a different report, in a different statement. It doesn't need to be seen on the statement of activities. Ideally, what we'd like to see is one line, right? That just says consulting, right? Even this is too much detail, right? Because here, what you're telling me is that in each of these three lines, I'm able to see what this consultant makes, what this consultant makes, and what this consultant makes. That's also a lot of detail. And then we start getting into confidentiality and really just putting too much on front street, right? The idea is to just have a general account, but if someone ever did ask, okay, what makes up that account? Then of course we can dig into the details, right? But on the onset, right, when we are just running our financial statements and we're just running that statement of activities, here is where you want to live. So I hope having this visual really showed you the difference between what you want to do and what you don't want to do. Now that is all for this video. I hope you really got something out of this. I hope you were able to see what the chart of accounts should look like. What are some of the things that you need to be thinking about when you're building it out? And remember, this is something that you want to do before you start getting into the nitty gritty of shelling out reports and messing around in QuickBooks online, right? Or if you are an established organization and you're looking at your financials and you're like, this looks muddy, there's a lot happening here, then that is a clear indication that your chart of accounts could use an overhaul. And so first you want to determine what does that look like, right? Get it on paper, get it in Excel, determine what it needs to look like first, and then you can move forward with actually changing things and implementing it in the actual accounting software. So thanks again for watching. I will see you guys in the next video.