The functional areas included in the statement of functional expenses typically include programs, fundraising, and management and administration. This presentation appears as a matrix, where each functional area is listed across the top row of the report, and the expense types are listed down the left side. The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received).

What Is a Statement of Functional Expenses? A Quick Overview for Nonprofits

It may also have 50 general ledger accounts for each of its major programs, plus many accounts under its fundraising and management and general expense categories. The number of accounts in a nonprofit’s general ledger could range from 30 to 1,000 or more. The number of accounts depends on the number of programs that the nonprofit has, the types of revenues it earns, and the level of detail required for planning and control of the organization.

Expense Types Included in the Statement of Functional Expenses

The COA should be simple, flexible, and make sense with the expense functions. It should be clear when an expense code is used, which functional category the expense is allocated to. It is important to never delete an account that has been used in the current year. The chart of accounts (COA) of the organization should efficiently facilitate functional expense allocation. The chart of accounts acts as the framework for classifying all transactions that occur within the organization.

• A listing of the accounts available in the accounting system in which to record entries.
• For example, an organization may incur travel expenses related to program services, fundraising and management activities.
• This statement actively provides insight into the effective use of resources to fulfill the organization’s mission.
• If a company’s stock is publicly traded, earnings per share must appear on the face of the income statement.
• Budgeting is also complicated when sources of support are not secured at the time the budget is prepared for the upcoming year.
• Expenses such as payroll costs, depreciation, and rent are typically attributable to multiple functional expense categories.
• While businesses are organized to generate profits, nonprofits are organized to address needs in society.

Illustration of the Statement of Financial Position and the Statement of Activities

Additionally, it provides valuable insights into cost allocation across various areas, aiding in planning and decision-making. Accordingly, the Statement of Functional Expenses is a key component of nonprofit accounting. Specifically, the detailed roadmap actively shows how the organization allocates its funds. This provides a clear view of how the organization uses resources to advance its mission.

A key component of this accountability-focused approach to accounting is compiling financial statements, which are documents that summarize your nonprofit’s use of funds. As nonprofit accountants, it’s vital to know the ways to report expenses to the IRS for your nonprofit clients, and one of the most important parts of that is understanding the role of a statement of functional expenses. Part of building trust with the community, donors, board of governors, and other stakeholders is to be transparent in how the nonprofit organization’s expenses drive support for its missions and programs.

Nonprofit Accounting Terms

We’re here to talk about functional expenses, but the Statement of Functional Expenses actually shows 2 types of expenses– functional and natural. In this Food Truck Accounting article, we’ll break it all down to show you what functional expenses are, why they matter, and how to track them in your organization. But, because most for-profit companies don’t track functional expenses, they’re just not familiar with it.

• Good accounting software will also allow directors to compare budgeted amounts to actual amounts and make the necessary adjustments.
• Jo-Anne Williams Barnes, is a Certified Public Accountant (CPA) and Chartered Global Management Accountant (CGMA) holding a Master’s of Science in Accounting (MSA) and a Master’s in Business Administration (MBA).
• The statement of functional expenses is required for you to maintain your tax-exempt status.
• Nonprofit accountants should have a basic understanding of nonprofit fundraising software, and how to help their clients keep up-to-date records of expenses through the use of these software solutions.
• Specific to categorization, organizations can require employees to categorize and tag every expense before submitting an expense report.

To create your report with the template, list all your natural expense categories in the first column. Rather, it’s a way of looking at how you spent your money, according to the function that money accomplished. Functional expense reporting confuses many first-time nonprofit bookkeepers and executives.

• If that is not clear, then the expenses should be reported in the period in which they are used up.
• Understand what you are trying to express, and what data you may need to gather.
• But making this allocation can be easier said than done since there is no standard methodology, and costs differ depending on a nonprofit’s programs and use of resources.
• However, the functional expense categories of program, administrative, and fundraising costs are consistent for all nonprofits.
• Functional Accounting refers to the process of classifying functional expenses.
• The chart of accounts consists of balance sheet accounts (assets, liabilities, stockholders’ equity) and income statement accounts (revenues, expenses, gains, losses).

Firstly, it offers transparency to donors, members, and regulators by explicitly demonstrating how the organization uses the funds. It helps leadership understand the full costs of each function, which aids in strategic decision-making and budgeting. At The Charity gross vs net CFO, we work exclusively with nonprofit organizations to give them accurate books, timely reports, and expert advice on their nonprofit finances.

It serves as a critical tool for financial transparency statement of functional expenses and accountability, providing stakeholders with valuable insight into how an organization utilizes its resources. Functional Accounting refers to the process of classifying functional expenses. Functional accounting actively assigns every dollar to a specific ‘why’, either for support services or designated programs. If you use functional accounting, you can easily monitor each dollar coming in and going out.