Functional expenses are reported by their functional classification. In accordance with the Financial Accounting Standards Board guidelines, all nonprofit organizations in the US are now required to report their expenses based on their functional and natural classification. Functional classifications describe the purpose of the expense, while natural classifications describe what the expense covered. Nonprofit organizations report their expenses by both functional and natural class.
Once functional expenses have been created and assigned in the system, they can be reported on alongside natural expenses.
Functional Classifications
Programs
Program expenses consist of any costs related to running the various programs and services offered by a nonprofit organization that are in alignment with its mission. For established nonprofits, program expenses often make up the majority of their overall costs.
Management and General
Management and general costs are supporting expenses associated with funding the day-to-day operations of the organization. These expenses do not directly relate to the mission of the nonprofit and typically include costs like governance, bookkeeping, and management.
Fundraising
Fundraising costs are supporting expenses associated with an organization’s call for financial support or monetary contributions. This would include all expenses related to fundraising events, direct mail campaigns requesting donations, and the salaries of employees working on fundraising.
Natural Classifications
Organizations also present their expenses by natural classifications, which can include the following:
- Salaries
- Office rent
- Insurance
- Utilities
- Repairs
- Office supplies
- Depreciation
Nonprofit accounting differs from business accounting because nonprofits do not exist to make profits. Instead, they work to fulfill their mission aimed at addressing specific needs in society.
It is crucial that nonprofit organizations understand how to properly record functional expenses to ensure they are in accordance with federal regulations.