Statement of Functional Expenses

The Statement of Functional Expenses shows every expense your organization incurred during a period, arranged as a grid: one row per natural class of expense (what you spent money on) and one column per functional category (why you spent it). It's the report that answers the question "how much of our budget is going to programs versus administration versus fundraising?" Under ASU 2016-14, this analysis of expenses by both nature and function is a required disclosure in the financial statements for all nonprofits following US GAAP, and the same information also feeds Part IX of Form 990 for organizations that file it.

Donors, grantors, charity watchdogs, and the IRS all care about the split between program expenses and supporting expenses. A nonprofit that spends 85% of its budget on program delivery tells a very different story than one that spends 40%. The functional expenses report is the source of truth for that split, and it's the basis for Part IX of Form 990. NP Ledger generates this report from two fields on your expense accounts: the Natural Class (what the money was spent on — salaries, occupancy, supplies, etc.) and the Program/Project designation on each expense line item.

• Expense accounts configured with a Natural Class (Salaries and Wages, Employee Benefits, Professional Fees, Occupancy, Travel, Depreciation and Amortization, Supplies, Insurance, or Other Expenses)
• Posted expense transactions in the period
• Programs and projects set up, so expenses can be associated with program activity versus management and general or fundraising

Running the report

1. Go to Reports > Functional Expenses (in the sidebar).
2. Set the date range using the filter controls — typically a full fiscal year for Form 990 preparation.
3. Optionally filter by fiscal year for a quick preset.
4. Click "Apply" to generate the report.

Reading the report

The report shows a grid:

• Rows are natural classes — Salaries and Wages, Employee Benefits, Professional Fees, Occupancy, Travel, Depreciation and Amortization, Supplies, Insurance, and Other Expenses. These map to (and roll up into) the more granular line items on Form 990 Part IX, so you can use this report as a starting point when your 990 is being prepared. Each expense account in your chart of accounts is assigned to one of these classes on the account setup form.
• Columns are functional categories — typically Program Services, Management and General, and Fundraising. The column each dollar falls into is determined by the program/project assigned on the expense line item.
• Column totals at the bottom show how much of the period's total expenses landed in each function.
• Expense ratios — each column's total as a percentage of grand total — appear beneath the totals when the grand total is greater than zero.

Read across a row to see how a single category of cost (say, Salaries and Wages) was split across the functions. Read down a column to see the full cost of running programs, management, or fundraising activities.

Exporting the report

1. Click "CSV" for a spreadsheet version you can paste directly into a Form 990 worksheet or hand to your CPA.
2. Click "PDF" for a board-ready version.

• Every expense has landed in a function. Expenses with no program/project assignment typically fall into the default function. Review any uncategorized totals and reassign them if needed before finalizing the report.
• Your program ratio matches what you're telling donors. If your marketing materials claim 90% goes to programs and the report shows 65%, either the marketing is wrong or the expense allocations need work.
• Depreciation and allocated costs — if your organization allocates shared costs like rent or utilities across functions, make sure those allocations are reflected in the underlying transactions.

• Lumping all expenses into one function. A common beginner shortcut is to post every expense to the default "unassigned" program and call everything "Program Services." The IRS expects an honest split. Take the time to think through which costs are genuinely program delivery versus the cost of running the organization (management and general) or raising money (fundraising).
• Misclassifying the executive director's salary. If the ED spends 50% of their time on program work, 30% on management, and 20% on fundraising, their compensation should be split across those three functions — not posted entirely to Salaries and Wages under Program Services. Most organizations use time studies or reasonable estimates to support the allocation.
• Forgetting about joint costs. Activities that combine fundraising with program messaging (a newsletter that describes program work while soliciting donations, for example) may need to be allocated under the joint-cost rules in ASC 958-720. When in doubt, ask your auditor.
• Running the report before closing the period. Adjusting entries for accrued expenses, depreciation, and allocations may still be outstanding. Make sure those are posted before finalizing the report for Form 990.

Accountant note: Per ASU 2016-14, the Statement of Functional Expenses is a required component of the financial statements for all nonprofits following US GAAP — not just voluntary health and welfare organizations as under the previous standard. The classification structure (natural class rows, functional category columns) aligns with Form 990 Part IX, which asks you to disclose expenses on the same basis. Allocation methods used to split shared costs across functions should be consistent from period to period and disclosed in the notes to the financial statements.