Nonprofit organizations have a unique way of reporting their expenses, which is different from for-profit businesses. 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. In this post, we’ll explore these methods in more detail.
Reporting by Nature
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. Reporting expenses by nature is useful because it shows the different types of costs involved in running a nonprofit organization.
Some examples of expense categories that nonprofits might use when reporting by nature include:
- Salaries and Wages
- Rent and Utilities
- Office Supplies
- Professional Fees
- Travel and Conferences
Reporting by Function
Reporting expenses by function means grouping expenses according to the programs and activities they support. This is done to show how funds are being used to achieve the organization’s mission and purpose. Common functional expense categories include program services, management and administration, and fundraising.
Program Services: This category includes expenses related to the nonprofit’s primary mission, such as providing education or healthcare services. Some examples of expenses that might be included in program services are salaries and benefits for program staff, supplies and materials used in the program, and rent and utilities for program facilities.
Management and Administration: This category includes expenses related to managing the organization as a whole, such as salaries and benefits for administrative staff, rent and utilities for administrative offices, and professional fees for legal and accounting services.
Fundraising: This category includes expenses related to raising funds for the organization, such as salaries and benefits for fundraising staff, expenses for fundraising events, and professional fees for fundraising consultants.
Why is Reporting by Function Important?
Reporting expenses by function is important for several reasons.
- Reporting expenses by function is required by the IRS for nonprofits that file Form 990.
- It allows donors and stakeholders to see how the nonprofit is using its funds to achieve its mission, which can help build trust and confidence in the organization.
- It can help nonprofits identify areas where they may be overspending or underspending, which can lead to more efficient use of resources.
- It provides a clear picture of how much is being spent on specific programs, management and administration, and fundraising.
- It can be used to compare expenses from year to year, which can help nonprofits track their progress towards their goals and adjust their strategies as needed.
Reporting expenses by nature and function is an important part of nonprofit accounting. By tracking expenses in this way, nonprofits can provide detailed information about how their funds are being used to achieve their mission and purpose. This information is important for building trust with donors and stakeholders, complying with IRS requirements, and making informed decisions about budgeting and spending. Nonprofits should work with their accounting professionals to ensure they are reporting expenses accurately and in accordance with applicable accounting standards.