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

As mentioned above, functional expenses are essentially an allocation of expenses by purpose. 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. As a nonprofit, you receive your non-profit IRS designation as a 501(c3), 501(c4) or 501(c6) because you promote and serve the public good. By viewing the statement of functional expenses as more than a tax-filing requirement or public relations medium, you can also pursue good governance to improve your mission’s effectiveness. Contact the experts at Jitasa to compile your nonprofit’s statement of functional expenses.

• Essentially, anyone interested in understanding the financial operations of a non-profit organization will find this guide useful.
• As with any other accounting-related matter, documentation to support the allocations is the key.
• The easiest way to start an allocation is by first identifying expenses incurred for a specific program or support service — they’ll be allocated directly.
• So if you’re ready to modernize your finances and finally find the time to focus on your mission, click the button below to find out how we can help you.
• Tyler’s extensive background in accounting, tax, and financial consulting set the foundation for Velu’s outsourced accounting solutions for nonprofits and small businesses.
• Now, before you begin allocating all of your costs to program, you should be aware that Generally Accepted Accounting Principles (GAPP) allows only certain costs to be considered programmatic.

How to efficiently categorize nonprofit expenses for a Statement of Functional Expenses

For example, a management employee might be spending 30% of her time in fundraising activities but her entire salary has been recorded as management and general expenses. Program expenses (or program services expenses) are the amounts directly incurred by the nonprofit in carrying out its programs. For instance, if a nonprofit has three main programs, then each of the three programs will be listed along with each retained earnings program’s expenses. If the nonprofit’s board of directors designates some of the nonprofit’s unrestricted assets for a specific purpose, those assets must continue to be reported as net assets without donor restrictions. The following table compares the main financial statements of a nonprofit organization with those of a for-profit corporation.

• For example, if an organization formed for the purpose of providing financial assistance to students disburses a scholarship, that full amount would be recorded under program services.
• The Statement of Functional Expenses is a key financial report for non-profit organizations.
• This information can be easily accessed via a lookup of similar organizations’ Form 990s on GuideStar or other similar sites.
• The Statement of Functional Expenses that nonprofits issue is referred to as a matrix, because it requires organizations to report their expenses by both functional and natural classification.
• Doing so provides greater insight to prospective donors and other readers of the financial statements as to how the organization is using its resources.
• By leveraging its advanced features, nonprofits can efficiently categorize expenses and generate a Statement of Functional Expenses that meets regulatory requirements and enhances transparency.
• The income statement reports the revenues, gains, expenses, losses, net income and other totals for the period of time shown in the heading of the statement.

Allocation Method #2: Count Per Person

If you organization is undergoing a nonprofit audit, you must present expenses by functional area as part of your accounting. A CPA must include a statement saying that the financial documents were prepared according to generally accepted accounting principles (GAAP). Tyler’s extensive background in accounting, tax, and financial consulting set the foundation for Velu’s outsourced accounting solutions for nonprofits and small businesses. As a fractional CFO, he goes beyond routine duties, guiding organizations with strategic insights for sound financial decisions. Velu’s services address the unique challenges faced by nonprofits and small businesses, fostering sustainable growth.

Allocation Method #3: Time Studies

These 3 expense categories are mandatory for the IRS, but you may choose to track others internally. An easy way to allocate these expenses if by having your volunteers and employees record what they do with their time. If you’re a nonprofit interested in improving your expense categorization and organization, contact our sales team to learn more.

Related AccountingTools Courses

To do that, we’ll follow the activities of a nonprofit organization called Home4U, a daytime shelter for adults. Understanding how to prepare a Statement of Functional Expenses is key to effectively manage your non-profit organization’s finances. It helps you ensure that funds are being used efficiently and in alignment with your mission.

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. So if you’re ready to modernize your finances and finally find the time to focus on your mission, click the button below to find out how we can help you. But if you need to make one manually, it’s pretty easy to do in any spreadsheet software. If you’d like to take a shot at it, click here get our FREE STATEMENT OF FUNCTIONAL EXPENSES TEMPLATE.

Data Collection

The detail in the general ledger accounts will always be available for management’s use. However, the account Bookstime balances will be combined into a few amounts that are presented in the financial statements and IRS Form 990. A second issue is whether a donor’s contribution to a nonprofit organization will qualify as a charitable deduction on the donor’s income tax return.

The purpose of a statement of functional expenses is to show how much of your money and time you spent on each of the categories mentioned above. The systematic allocation of the cost of an asset from the balance sheet to Depreciation Expense on the income statement over the useful life of the asset. (The depreciation journal entry includes a debit to Depreciation Expense and a credit to Accumulated Depreciation, a contra asset account). The purpose is to allocate the cost to expense in order to comply with the matching principle. In other words, the amount allocated to expense is not indicative of the economic value being consumed. Similarly, the amount not yet allocated is not an indication of its current market value.

Our intent is to merely introduce some of the basic concepts that are unique to nonprofit accounting and reporting that are required by the Financial Accounting Standards Board (FASB). Functional expense reporting is the process of tracking the money you spend according to what the money was used for– like fundraising, administration, or programs. Looking at the number of people working on each program at the nonprofit business statement of functional expenses and the expenses they accrue, one can determine each individual employee’s and program’s expenses.