The functional expense classifications for a nonprofit organization would be Program #1, Program #2, Management and General, Fundraising.Businesses have functions such as manufacturing, selling, and general and administrative. This must be provided in one location in your financial statements. Copyright © 2020 AccountingCoach, LLC. Functional expense allocation is the process by which a nonprofit organization’s accountant or bookkeeper classifies each expense by its functional classification. Sorting and reporting expenses according to the type of activity for which the expense was incurred. Functional Expense Reporting under the New ASU 2016-14 Presentation of Financial Statements for Not-for-Profit Entities Alison Fetzer. is known as natural expense classifications. Functional expense reporting, when done accurately and consistently, can provide a realistic picture of the total cost of operating an organization. The functional expense classifications for a nonprofit organization would be Program #1, Program #2, Management and General, Fundraising. For a business, the reporting of expenses by function means the income statement will report expenses according to the following functional classifications: manufacturing, selling, general administrative, and financing. This may be in the notes to the financial statements, in the statement of activities, or as a separate statement of functional expenses. 07.25.17. Office expenses such as copiers, phone and postage … Examples include Neighborhood Networks, bank charges, investment fees, … The post just prior to this series, Demystifying Nonprofit Overhead, made the case for why you should care about overhead and introduced the broader topic of functional expenses. In our last post, Understanding Functional Expenses – Part 1 of 4, we covered the definition of cost vs. expense.We then dove into the nitty gritty of what expenses are considered to be fundraising. Natural classifications explain what the Many nonprofits already do this. The functional expense classification is a sorting and presentation method used in accounting, under which expenses are aggregated and reported by the activities for which they were incurred. The upshot of functional expense reporting for bookkeeping is that you need to code each expense two ways, by: Natural classification – by account in the chart of accounts such as salaries & wages, rent, travel or office supplies and; Nonprofit organizations are constantly under scrutiny as to how they allocate their functional expenses in their statement of activities. Upon the implementation of ASU 2016-14, all not-for-profit entities will be required to present an analysis of expenses by function and nature in one location. Sorting and reporting expenses according to the type of activity for which the expense was incurred. Accounting BestsellersAccountants' GuidebookAccounting Controls Guidebook Accounting for Casinos & Gaming Accounting for InventoryAccounting for ManagersAccounting Information Systems Accounting Procedures Guidebook Agricultural Accounting Bookkeeping GuidebookBudgetingCFO GuidebookClosing the Books Construction AccountingCost Accounting FundamentalsCost Accounting TextbookCredit & Collection GuidebookFixed Asset AccountingFraud ExaminationGAAP GuidebookGovernmental Accounting Health Care Accounting Hospitality Accounting IFRS GuidebookLean Accounting Guidebook New Controller GuidebookNonprofit Accounting Oil & Gas Accounting Payables ManagementPayroll ManagementPublic Company Accounting Real Estate Accounting, Finance BestsellersBusiness Ratios GuidebookCorporate Cash ManagementCorporate FinanceCost ManagementEnterprise Risk ManagementFinancial AnalysisInterpretation of FinancialsInvestor Relations GuidebookMBA GuidebookMergers & AcquisitionsTreasurer's Guidebook, Operations BestsellersConstraint ManagementHuman Resources GuidebookInventory Management New Manager Guidebook Project ManagementPurchasing Guidebook.