Generally Accepted Accounting Principles and certain Internal Revenue Service filings require nonprofit organizations to report expenses by functional category. The categories are program, management and general, and fundraising. Most often, organizations only perform a retrospective look back on these allocations when asked by their auditor. Given the attention functional reporting has received in recent years, management should place greater emphasis on this reporting and review allocation methodologies more frequently.
Some common mistakes that nonprofits make include:
In an effort to avoid these pitfalls, there are several recommendations for tracking expenses. For direct expenses, Quickbooks users can try setting up classes or modifying the chart of accounts to add accounts for each functional classification. For indirect expenses, your organization should perform regular time studies for allocation of employee salaries and benefits, analyze usage of space and use square footage percentages for expenses such as rent, utilities, and depreciation, and choose a percentage of direct costs for other expenses.
Note that different application methodologies can be used for different expenses and the process is unique to each organization. However, ensure the methods chosen are reasonable, consistent from year to year, and documented. Finally, make time to perform a review of this reporting annually as it can make the difference between strong and weak accounting systems.
By Megan Mulherin, CPA, Supervising Senior Accountant