How to Code Transactions

To properly code transactions, you have to do it three different ways. Why?

Many nonprofit organizations are asked a common question from their funding sources: can you run a profit and loss statement so we can see where we are at in our contract? 

If the answer is no, it becomes a problem because you don’t know: 

• How much money you’ve used 
• How much money is left 
• If you’ve used it for the right reasons

However, if you code everything three different ways, you’ll be able to answer these questions quickly, accurately, and efficiently. 

Let’s dive into the three different ways you should be coding transactions and why each way is helpful. 

1. Code Transactions Based on the Chart of Accounts

Every accountant is already doing this because every organization has a chart of accounts, which is also called a general ledger. 

Essentially, it’s recording each transaction as a revenue or expense based on what it is. It’s very straightforward but is a crucial step, so if you’re not already, you need to start coding transactions based on a chart of accounts number. 

As an example, let’s say your nonprofit works with us, Morris Verdonk Accounting for financial guidance. When we invoice, you should consider it as a professional service fee and you’ll record it as such in your chart of accounts. 

2. Code Transactions Based on the Program

When you are asked about your organization, you likely have an elevator pitch and a highlight reel of your programs and events. 

But can you go into more detail about these programs/events to answer tougher questions like: 

• Which of these programs/events makes money?
• Which of these programs/events loses money? 
• Do you have any employees logging time for these programs/events? 

This is when coding based on the program becomes extremely helpful. It will allow you to pull a P&L that will help you answer these questions for each individual program/event. 

Coding by the type of programs you have in your organization is also helpful for your CPA when they fill out your tax return. There is a whole section on your 990 that will ask to list all: 

• Administrative expenses 
• Program expenses
• Fundraising expenses

The process will be much easier if your transactions are already coded into these three categories. 

Returning to the previous example, if you were to receive an invoice for working with Morris Verdonk, you would code it as professional service fees and part of the administrative program. 

3. Code Transactions Based on the Funding Stream

Every nonprofit has multiple fundraising streams and many of those will require you to turn in reports, especially for private and government grants. 

Considering a lot of nonprofits are still receiving money from this, let’s say you have a government grant from the American Rescue Plan Act (ARPA). 

ARPA and other federal or local government organizations who offer financial support in the form of a grant also have the right to ask: 

• How you spent the money
• Whether or not you used it to pay employees
• Any expenses
• An indirect rate

Since it is federal or local government money, you’ll have to report to them on a reimbursement basis. When you code transactions based on the funding stream, you’ll be able to quickly access this information. 

Applying for grants often requires the same kind of reporting. Grantors will want to know if you have a matching grant and will expect a report back on how you used the funds. Their primary question will be: did you use the funds for the purpose that we gave them? 

Again, coding transactions based on your funding stream will make it easier to answer these questions. 

Tying this in with our earlier example, an invoice from Morris Verdonk will be coded as a professional service fee, under administrative expenses, and a part of the indirect or overhead allocation.

Need Help Coding Transactions? 

Depending on how your accounting is set up, you might already have it broken into three different categories for coding. 

If not, it may be time for an overhaul of your accounting system to:

• Set up new codes
• Set up new templates
• Do staff retraining
• Explain to staff why this system is useful

It’s essential that program managers look at reports to gain a strong understanding of how and why they are coding transactions in three different ways. 

That way, referring back to our original example, when they receive an invoice for something like a professional service fee from Morris Verdonk Accounting, they know how to record it properly.

To recap, every transaction, whether it’s a revenue or an expense, needs to be coded in three different ways: 

• A general ledger or chart of account number
• A program number
• A funding stream income number 

If you aren’t already properly coding your transactions, reach out to us at Morris Verdonk Accounting!

We’d love to walk you through the process so you can position your nonprofit’s financial system to be more accurate and efficient!