I’ll be the first to admit that QuickBooks and accounting, in general, is not my favorite part of running an organization. I also recognize that it is an area of improvement for most nonprofits. For this reason, I sought out someone who specializes in helping nonprofits successfully leverage Quickbooks.

Gregg Bossen is a practicing CPA with a full-service accounting firm located in Atlanta, Georgia that specializes in Nonprofits using QuickBooks.

Since 2000, Gregg has been teaching QuickBooks seminars around the country and is considered to be the Nation’s expert when it comes to Nonprofits that use QuickBooks. Gregg’s teaching style is funny and entertaining. His energy and knowledge of Nonprofits make his classes a unique experience. Gregg has taught new users as well as other CPAs, who are themselves considered experts in the software. In total, Gregg has taught over 3,500 seminars to more than 55,000 students.

For anyone that is interested in getting QuickBooks training for Nonprofits, Gregg kindly provided a discount code for you to use (this is not a paid plug, but simply a value-add for those who are interested).

Craig Van Korlaar (TopNonprofits) Q1: Should nonprofits use the default expense categories in QuickBooks, or do you recommend nonprofits start with a different set?

Gregg Bossen, CPA (QuickBooks Made Easy): I disagree with a lot of the defaults. Here’s how it works. In the desktop edition, when you create a new company it asks you to indicate its industry. If you select nonprofit, it generates a set of income and expense accounts. Same goes for the online version; only it is even more generic.

Part of the accounts that are needed aren’t there in the default views and will need to be added. The other task is removing accounts that the default set included that you don’t want.

QuickBooks has one account that it gives you in the default called “payroll expenses.” Instead of that, you’re going to want to have one for salaries and wages and one for payroll taxes. These should be separated out, and the amount that goes to salaries and wages is the gross pay. Then the amount that goes to payroll taxes is the employer share of FICA and Medicare. As well as state unemployment taxes owed. QuickBooks lumps them together, but they shouldn’t be shown that way. They should be separated out.

So you could either change “payroll expenses” to “salaries and wages” and then create a new account for “payroll taxes”, or you could delete “payroll expenses” altogether and then simply create the two new accounts.

QuickBooks also likes to start you out with parent accounts. You don’t need or want these. For example, you may see in the QuickBooks default account list a parent account called “business expenses.” You don’t need this. In fact, in this particular parent account, you won’t need any of the sub-accounts either. You can delete QuickBooks default parent accounts for “contracted services,” “facilities and equipment,” another for “operations” and one more that says “others.” Get rid of all of them.

Nobody even knows what ‘operations’ means. It means different things to different people. What you want to have in your accounts is what I call the “natural category of expenses.” By natural, I mean what somebody would think of as a natural expense – travel, supplies, salaries, rent, payroll taxes, equipment rental, postage, printing. Just a natural way of thinking about expenses. Keep things relatively high-level and don’t make the mistake of putting any of the names of your programs in the expenses (more on this later) and make sure not to have an expense account called “fundraising.” That’s not what you should be doing.

Q2: You mentioned not having project-based accounts. How should nonprofits handle donations or expenses that need to be earmarked for and reported as being part of a particular program?

Gregg: Right, you’ll want to use what is called a Class List in QuickBooks. You can think of classes as how a regular for-profit business would categorize departments or divisions, but that is not how we are going to use them. Nonprofits typically use it to track their various program, fundraising, and admin costs. Houses of worship also use them to track funds.

To use classes, you’ll first have to turn on this feature. In the desktop version, you go under Edit Preferences and go to the accounting preference, internal and class tracking. Turn them on.

In the online edition, you go to the account and settings again. Then you go to Advanced, and it’s under an area called Categories, Track Classes. Turn them on.

Then each one of your funds or projects or programs will be listed as a class.

In the desktop edition, you set up classes by going under Lists and then click Class List and then you can add your classes there.

In the online edition, you go to the gear and click All Lists, click on Classes, and then add your classes there.

Now, when you enter transactions, you can point it to an account, and then you can also point it to a class. That way, you don’t have to have “supplies” for Fund A and “supplies” for Fund B in the chart of accounts list. You just have one account called “supplies,” and then you have a different list that can show a breakdown by fund A and fund B.

Q3: So what should income/revenue categories look like?

Gregg: On the income/revenue side, QuickBooks by default breaks up unearned revenue (money given to you via donations or grants) into direct public support and an indirect public support. Get rid of it. It’s ultimately not helpful to most readers. Instead, I would replace it with one for Individual Donations, one for Corporate Donations, one for Foundations, and one for Government Grants. That’s a much more logical way to look at it. It’s how you’ll have to report it on the audited financial statements, and it’s an easier way for the board to be able to understand where the money is coming from.

If you have earned income from things like membership dues, tuition income, or ticket sales, you want to have income accounts for those as well. Don’t get too granular on your income accounts. In other words, if you have different types of members like affiliate members or retired members, don’t have a separate account for each one of those. There’s a different list for that.

So in closing to question one, the idea is to not have many income or expense accounts so that when you print out a profit loss compared to budget for the board, it will fit on one page and the board will be able to read it. If you have too many accounts; say two, three, or four pages, the board won’t read the financial statements.

Q4: Can you quickly run us through how to use class lists for income accounts?

Gregg: You’d assign them to your income transactions in the same way as you did for expenses. Unrestricted gifts should be pointed to the fundraising class. When it comes to entering a donation or grant that is earmarked for a specific program, project or fund, for example, you’d designate the account and then select the class from the dropdown. This way, we know that it’s for that program, project or fund. You should also point expenses that are being paid for out of that program, project or fund to that same class. This way, if it’s a program or project, you can run a P&L for that class and see whether the program or project is paying for itself. If you are using the Class list to track funds, you know how much money is left in the fund at any given time by running a P&L for that individual class. This is assuming that all fund expenses are pointed to expense accounts.