How to structure your charity’s chart of accounts: Part one

Financial Planning Accounting Report Spreadsheet Concept
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Jen Gerrard
Managing director
Gerrard Financial Consulting
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Your charity’s chart of accounts (COA) is the collective term for your list of nominal ledger accounts, which can be grouped into certain categories – such as income, expenditure, assets, liabilities and funds – forming the basis for your organisation’s financial reporting.

From time to time it is prudent to review your COA and consider whether it continues to be fit for purpose.

In this two-part series, we explore:

  • When you might review your COA
  • Suggestions around how to structure your charity’s COA – including the provision of examples to download

Part one looks at the statement of financial activities (SoFA) - income and expenditure categories. Part two finishes up with the balance sheet.

When to review your COA

“How do you know whether it is fit for purpose?!” I hear you ask.

A review of a charity’s COA might typically occur in the following situations:

Budget setting

Before work starts on the budget for the next financial year, you will usually find that there are some nominal codes which are now redundant, some new ones needed, more detail is needed (eg three specific codes would be better than one generic code) or indeed that less is more (eg combining ten grant codes into two).

It is best practice to review your COA each year prior to circulating budgeting templates to managers and department heads. This way the new organisational budget, as and when it is collated, will align nicely with your revised COA.

Problems can arise in the reporting of actual performance against budgeted performance when this is not done and when the budget was set under the ‘old’ COA yet the finance team have revamped the COA. There might be little/ no clear correlation between new and old codes and some actual lines with no budget allocations and vice versa.

Alignment is crucial, as is ensuring that any fund accounting has been taken care of (see below).

New finance system

One of the best opportunities to review your COA is when your charity is considering a change of finance system, whether that is moving from Excel spreadsheets to a computerised package for the first time or whether your charity is migrating from a desktop accounting package to a web browser-based package (eg QuickBooks Online or Xero).

Of course, this is also the ideal time to tidy up those old donor and supplier lists too, ridding yourself of individual accounts which have not been used in the last five years.

Growth and/or change in reporting requirements

Of course, we all love it when we have a new SORP, or other regulations introduce changes to how the charity sector should be reporting on its activities.

As a charity’s finance manager, one of the toughest elements of financial reporting is ensuring that the COA is flexible enough to meet the reporting requirements of both management and the board of trustees (by way of the management accounts) and the accountant (for the purposes of SORP and year end statutory reporting).

It is a fine balancing act and one that should be considered carefully.

If your management accounts process is nicely refined and reporting is super-efficient, yet your accountant spends lots of time at the year end unravelling your reporting – eg further analysis of account codes called ‘miscellaneous income’ or ‘sundries’ and compilation of funds statements – your charity is likely to be incurring unnecessary accountancy fees which could be avoided through a simple review of your COA.

Your COA: Income and expenditure headings

The ideal COA would reflect the requirements of the Charities SORP – 2015 (FRS102). However, as I’ve already mentioned, you need your COA to also meet management reporting needs.

The SORP is always a good place to start, expanding headings as necessary to accommodate any extras.

If you adopt the SORP structure, the benefits are threefold:

  • Simpler end of year process as your accountant can easily map your COA to the statutory accounts format requirements (above)
  • New finance team members, who are already familiar with charity accounting, should be able to navigate your COA and accounting system more easily than if you have a completely bespoke structure
  • There is always a point of reference (in the SORP itself) for what accounts you may need

The SORP splits income into the following categories:

  • Donations and legacies
  • Other trading activities
  • Investment income
  • Charitable activities
  • Other incoming resources

In turn, resources expended can be analysed across:

  • Costs of raising funds
  • Costs of charitable activities – ie direct, support and governance costs

Your COA would ideally group its (more detailed) nominal codes under these categories. For example, you may have a nominal entitled “Grant income – restricted” which would be grouped under income from charitable activities.

Download our SORP 2015 help sheet here which aims to help you assess how to group your income and expenditure nominal codes.

Your COA: Tips and suggestions

Whilst it would be great to be able to have a ‘one size fits all’ approach to your charity’s nominal coding, all charities are unique. As we know there are various sub-sectors within the sector (eg health and welfare, equality, education, grant-giving) and the funding structure of each organisation will, in turn, be completely different (eg local authority service level agreements, grants, donations, investment income).

Here are some tips to get you started:

  • Avoid inflexible nominal descriptions

Common errors when establishing a nominal code list include being too specific or narrow with your code descriptions.

For example, I have seen many organisations who receive various restricted grants. Their default position has been to have an individual income code for grant income from each funder. The problem with this is that, over time, funders change and the charity then has numerous “DO NOT USE” or obsolete codes on their trial balance – simply gathering dust.

Best practice is to keep your nominal codes generic and handle aspects of fund accounting (ie tracking restricted income and expenditure by funder and/ or project) using a separate set of department or class codes.

That way, your COA stays succinct, tidy and current for longer.

  • Funds brought forwards

Whilst funds sit on your charity’s balance sheet for annual reporting purposes, we encourage clients to include their brought forward funds at the bottom of the SoFA to assist departmental reporting.

In other words, you would create some nominal codes for each type of funds brought forward (eg restricted, unrestricted) so that the balances pop up at the bottom of your income and expenditure reports. That way, when you review individual departmental reports, for example, you can see both the income and expenditure for the period but also total funds carried forward. Surplus/(deficit) for the period, plus your brought forward funds = total carried forward.

  • Direct v support costs

Come the year end your accountant will undoubtedly be asking you which nominal codes are direct costs and which are support and/ or governance costs. We recommend making use of default accounts package settings to make this clear from the outset.

For example, most packages will be set up to default to a commercial ‘profit and loss’ account structure using income, cost of sales and overhead categories for grouping nominal codes. By setting up your direct cost nominal codes as a ‘cost of sales’ category and your support and governance costs as ‘overhead’ codes, your management reports will automatically segregate the costs for you.

The clarity and distinction between cost types can be especially useful when reviewing the core costs of a charity – for the purposes of a reserves policy update for example.

Downloadable examples

Below are two sets of basic income and expenditure code suggestions for differing types of organisation:

The files are in an Excel file format for you to download, tailor, and maybe even import to your own accounting system if compatible.

Next month we explore the balance sheet and best practice codes to account for routine transactions such as payroll and timing differences. In the meantime, should you have any queries around how to structure your COA or nominal coding then drop me a line and I’ll be happy to advise.

About Jen Gerrard

About Jen Gerrard

Jen is a Fellow of the Association of Chartered Certified Accountants (FCCA) and the founder and managing director of Gerrard Financial Consulting, a specialist accounting firm for the charitable sector. She has over 17 years’ experience working in accounting and finance and has also worked as an accountancy tutor for a leading training provider.

Jen has been a trustee of the Southville Community Development Association (2014 to 2017), Self Injury Self Help (SISH) (2013-2016), the Oswestry Food & Drink Festival and Impact AAS (2007 to 2010). In addition to being a current Trustee of Women’s Aid Federation of England, Jen has been a registered volunteer with Volunteer Bristol for four years and is a Member of the ICAEW Charity & Voluntary Sector Specialist Group.

Jen sits on the South West & Wales Regional Engagement Forum of the Charity Finance Group and makes regular contributions to articles in national publications – most recently AccountingWEB and Charity Finance Focus (produced by the CFG). She is also a regular speaker on charity finance and governance matters.

Her firm is a corporate member of the Charity Finance Group and was shortlisted in two categories for the AccountingWEB Practice Excellence Awards 2016. This is in recognition of the company’s innovative work with charities and NFPs to streamline their finance functions through adoption of new technology.

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04th Oct 2017 12:30

This is an outstanding article of practical use to anyone, especially an accountant, who is roped in to helping with the accounting for a voluntary organisation. Looking forward to the next one.

And it's a small world. Many years ago when I lived in the UK, my eldest child spent some very happy times as a toddler in the First Steps Nursery in the Southville Centre operated by the Southville Community Development Association in Bristol. Great work Jen.

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