Reporting Expenses for Non-Profit Organizations

Generally accepted accounting principles (GAAP) require non-profits to report expenses on a functional basis. What this means is that expenses must be broken out into categories of program services and supporting activities. Supporting activities generally includes administrative expenses, fund raising expenses and membership services.
Program services are those activities which help fulfill the purpose or mission of the non-profit. These services generally include salaries, rent, supplies, etc., basically anything that is used directly in one of the programs relating to the mission. It should be noted that some things, like rent, might have to be allocated between different functional categories if it is not completely identifiable to just one of the categories.

Support services include general and administrative, fundraising and membership services. Administrative expenses are those expenses that do not relate directly to a program, but are not considered fund raising or membership services. These expenses may include management salaries, budgeting, record keeping, etc. Fund raising expenses are the expenses incurred while eliciting funds for the organization. They can include fund raising campaigns, special fund raising events, maintaining donor lists, etc. Membership services include costs incurred for maintaining membership records and providing benefits to the organization’s members. This includes soliciting for prospective members and membership dues, membership relations, and similar activities.

The purpose of classifying expenses between program and supporting services is to help donors, creditors, or anyone else assess the organization’s service efforts to determine how funds are utilized. This makes it necessary to allocate certain expenses in order to create a more accurate reflection of costs incurred for each department of the organization. For example, rent for a facility that is used by both program personnel and administrative personnel must be allocated between the two categories. Other items that might need to be allocated include salaries (if an employee works both directly on a program and in an administrative capacity) depreciation, interest, etc.

This classification of expense can be done directly on the face of the financial statement or in the notes to the financial statements. Health and welfare organizations are required to report expenses based on their natural class as well (salaries, rent, interest expense, depreciation, etc.) in a matrix format in a separate financial statement or footnote. This is not required for other not for profit organizations, but is encouraged. All expenses are recorded as a reduction in unrestricted net assets on the statement of activities.