Nonprofit GAAP Guide: Reporting Expenses by Function vs Nature

Non-profits are required to present their expenses in a manner that provides meaningful information to their stakeholders. This involves creating a statement of functional expenses which categorizes costs according to their nature and function. Understanding the distinction between Accounts Receivable Outsourcing these classifications and employing appropriate allocation methodologies is essential for accurate and transparent financial reporting.

Understanding How Expenses are Reported by Nature and Function in Nonprofit Accounting

• Our experienced CPAs deliver everything from accurate bookkeeping and timely reports to in-depth guidance and strategic planning.
• Accurate tracking of costs is imperative to avoid charging the same costs to multiple grants or programs, which can lead to compliance issues and potential loss of funding.
• Moreover, it enables better financial planning and decision-making by providing insights into cost structures and resource allocation.
• The audience of an organization’s financial reporting includes funders, donors, boards of governors and regulators.
• Functional classification helps stakeholders understand how resources are being utilized to achieve the organization’s mission.
• Activities that represent direct conduct or direct supervision of program or other supporting activities require allocation from management and general activities.
• Many people are comfortable with natural expenses because most for-profit businesses classify their expenses ONLY by nature.

Completely and accurately reporting your expenses is essential. We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. In that case, you should allocate 40% of their salary (⅖) to admin expenses.

Distinguishing Between Nature and Function

• At The Charity CFO, we work exclusively with nonprofit organizations to give them accurate books, timely reports, and expert advice on their nonprofit finances.
• They instead fulfill missions aimed at addressing specific needs in our society.
• The square footage allocation example we used above is one common example of functional expense allocation.
• If you want to build trust, you need to give them an accurate, complete, and clear picture of your expenses.

This is because nonprofits need to provide detailed information about how their funds are being used to achieve their mission and purpose. Two ways nonprofits report expenses are by nature and function. Some expenses are “direct” since they are easily attributed to a single function, such as a fundraising gala expense going solely under fundraising, or a program staff member’s salary going under program services. Other expenses are “indirect,” meaning they need to be allocated among multiple functional categories. Examples include rent, IT infrastructure, depreciation, and certain shared staff salaries. Examples of natural expenses include salaries, rent, utilities, supplies, and travel.

Natural vs. Functional Classification

Certain costs benefit more than one function and, therefore, shall be allocated. Therefore, information technology costs generally would be allocated among the functions receiving direct benefit. Each line item (natural classification) is allocated across the three main functional categories (program, management and functional vs natural expenses general, and fundraising).

Tracking Costs and Avoiding Double Charging

Typically, bookkeeping these purposes are divided into program services and supporting services. Supporting services can be further broken down into management and general expenses, fundraising, and membership development activities, if applicable. Functional classification helps stakeholders understand how resources are being utilized to achieve the organization’s mission.

• For the latter, the bookkeeper must divide the item’s total cost across multiple categories according to their relative weight.
• With that in mind, the following are some best practices for organizations to keep in mind as they prepare these schedules.
• Examples include rent, IT infrastructure, depreciation, and certain shared staff salaries.
• Program expenses are any costs related to running the various programs and services offered by a nonprofit organization, as per its mission.
• It also includes the nonprofit’s net assets, which demonstrates the overall value of the organization, similar to the equity reported by businesses.

This method of expense reporting is most commonly used by nonprofit organizations. Reporting expenses by nature means grouping expenses according to what they are spent on, such as salaries, rent, and supplies. These categories are also known as expense categories or line items.

You calculate that they spend 70% of their time on mission-related work, 20% on non-mission administrative services, and 10% on writing grant proposals and participating in other fundraising activities. Finally, the Generally Accepted Accounting Principles (GAAP) require a statement of functional expenses, so you’ll need one to pass an audit. At The Charity CFO, we work exclusively with nonprofit organizations to give them accurate books, timely reports, and expert advice on their nonprofit finances. Then add all your functional expense categories in the first row. Many of your expenses (like salary, rent, and utilities) contribute directly to the execution of multiple functions. So for those categories, you’ll need to allocate your expenses according to how much they contribute to each function, which we’ll discuss a little further down the page.