How to set up a chart of accounts

Chart of accounts (COA) is the collective term for your charity’s list of nominal or general ledger accounts. These accounts provide a way of grouping certain categories and forms the basis for your organisation’s financial reporting.

By assigning every transaction with a category, you will be able to analyse income, expenditure, assets, liabilities, funds, and other elements when compiling reports.

Sage Accounting and other software will use these categories to aggregate transactions into the organisation’s financial statements and reports, such as the balance sheet and income and expenditure statement.

Properly setting up your COA is essential for creating meaningful and relevant internal controls, as well as external reports to outside funding sources.

A number of these financial terms are interchangeable. For example, general ledger and nominal ledger, or debtors and receivables. For clarity, where there are alternate terms, we often mention both.

Here is our step-by-step guide to setting up a COA.

1. Devise the high-level structure for your COA

The COA is numeric and at a high level typically follows a standardised order. This makes it easier to sort accounts by assigned categories for reports and when locating specific nominal ledger accounts.

• Assets: what you own, such as cash, receivables (debtors), inventory, and fixed assets
• Liabilities: what you owe, such as payables (creditors), loans, accrued expenses, and deferred income
• Funds (or equity): represents the net worth of your organisation
• Income: money coming in from grants, fundraising, goods, services, and investments
• Expenditure (direct costs and expenses): money going out for bills, salaries, rent, utilities, raising funds, and so on

In accounting, the following order is usually followed:

• Assets: 1000-1999
• Liabilities: 2000-2999
• Funds: 3000-3999
• Income: 4000-4999
• Direct costs: 5000-5999
• Expenses: 6000-9999

In the following steps we will examine each of the major account categories introduced above and devise the detailed account structure which needs to sit below this. In doing so, there is a balance to be struck in the number of accounts. Introducing more accounts allows a more detailed level of analysis but having too many accounts makes it hard to see quickly and clearly what is happening.

2. Structure your assets

The asset structure for most charities is relatively simple and needs to be split between current assets and fixed assets. Current assets typically comprise:

• Cash and bank
• Receivables or debtors (the money the charity is owed by commissioners, or customers for whom services are delivered)
• Inventories if the charity is producing or holding goods of any value
• Prepayments or deposits

Each of these categories can be further sub-divided as appropriate.

Consider which of these you need and what level of detail is required. If you don’t produce or hold any goods, you won’t need accounts for that category and if prepayments are relatively small then you won’t need any subdivision of this category.

Fixed assets are assets which are purchased for the long term. Some of the more common categories of fixed asset are:

• Land
• Buildings
• Plant (e.g. factories)
• Office and computer equipment and software
• Vehicles
• Furniture and fixtures
• Leasehold improvements
• Investments

Which of these you will need will again depend on the activities of your charity. Many organisations won’t own a plant and most charities won’t own any land or buildings, so these categories may not be needed. But many will own equipment, software, furniture, and fixtures. 

3. Structure your liabilities

The structuring of liabilities within a COA tends to be standard. This starts with short-term or current liabilities (those becoming due within 12 months) and long-term liabilities.    

Short-term liabilities will include trade creditors (for goods and services which have been purchased but not yet paid for), and bank overdrafts and loans due within a year.

Long-term liabilities typically include loans due after more than one year, leases, and where applicable multi-year grants which have been paid in advance.

4. Structure your funds

The standard accounts for a charity’s funds are unrestricted funds and restricted income funds.  However, some charities may have endowment funds and occasionally revaluation reserves.

We discuss restricted and unrestricted funds further in step 9.

5. Structure your income

Review the main types of income received by your charity.  These should be split into separate accounts. 

You should typically identify fundraising income and legacies separately from income for charitable activities (coming from contracts or grants), trading (e.g. charity shop income), and investment income. 

If it is helpful, you might also want to split out public fundraising from corporate fundraising and government grants from trusts and foundations.

6. Structure your direct costs

These are the costs directly associated with delivering the charitable activities of the organisation.

These will typically include salaries, other costs of employment of staff, and the costs of contracts of any third parties associated with the delivery of those activities.

7. Structure your expenses

The remaining expenses of the charity, once the direct costs have been accounted, will also need to be analysed.

In simple terms, these will be the overheads of the organisation and will typically include salaries of support staff, facilities costs, professional fees (legal and accountancy), marketing expenses, utilities, printing, postage, IT, and telephony.

8. Apply departmental overlay

For larger charities, it may be desirable to be able to analyse income and expenditure into different parts of the organisation (this might be a geographical segmentation or a functional analysis).

This is typically done by devising a set of departmental codes and applying these to the financial transactions. With some software, this departmental code is appended to the nominal ledger account, whilst in others it is treated as a separate field.

9. Restricted and unrestricted funds analysis

Charities who are in receipt of grants or raise funds for specific projects often need to treat that income as “restricted” income and account for it and all the matching costs separately. 

In a COA, this is best handled as a further overlay, using the same basic accounts with a set of fund codes to further analyse income and costs for all such grants or projects.

This will enable both accurate reporting back to grant providers and simple aggregation of restricted and unrestricted income and costs for reporting in the accounts.

10. Maintain your COA

It is recommended that you review your COA annually to assess whether it is still fit for purpose. This often ties to the budget cycle.

However, you might also want to review the COA if you are implementing a new finance system or if there is growth or a change in reporting requirements.