Accounting
Nonprofit Accounting
Nonprofit Management
Statement of Functional Expenses: How to Prepare It From Your Accounting System
Last updated: October 7, 2026 · Independent guide · We do not sell rankings or coverage.
A statement of functional expenses shows every expense your nonprofit incurred, broken out two ways at once: by its nature (salaries, rent, travel) down the rows and by its function (program services, management and general, fundraising) across the columns. Since FASB ASU 2016-14 took effect for fiscal years beginning after December 15, 2017, every not-for-profit that follows US GAAP must present this analysis of expenses by nature and function in one place in its financial statements. You prepare it by tagging each general ledger transaction with a function, allocating shared costs on a documented basis, and tying the result back to your ledger and to Form 990 Part IX.
How to use this template
The template below has two parts. Part A is a mapping workpaper: it tells you which general ledger accounts feed each natural expense line, which function each line usually belongs to, and which allocation basis to apply when a cost is shared. Part B is the statement layout itself, shown with illustrative figures so you can see how the columns and totals behave. Copy both tables into a spreadsheet, replace the account ranges with your own chart of accounts, and add a Total column to the right of Part B that sums the three function columns for each row.
The statement of functional expenses template
Part A: Mapping workpaper. The natural expense lines follow Form 990 Part IX, so the same mapping serves your audited statements and your tax return. Lines that rarely apply to a typical public charity (benefits paid to members, royalties, payments to affiliates) are left out; add them if you have them.
| Natural expense line (990 Part IX) | GL accounts to map (your ranges) | Usual function treatment | Allocation basis if shared |
|---|---|---|---|
| Grants to domestic organizations and governments (line 1) | Grants payable, subaward expense | Program, charged directly | None; code to the program at entry |
| Grants and assistance to individuals (line 2) | Scholarships, client assistance | Program, charged directly | None |
| Compensation of officers, directors, key employees (line 5) | Executive salaries | Split across all three | Time and effort records |
| Other salaries and wages (line 7) | Staff wages, temporary staff on payroll | By employee or department | Timesheets or payroll distribution |
| Pension contributions and other employee benefits (lines 8 and 9) | Retirement match, health insurance | Follows salaries | Salary dollars by function |
| Payroll taxes (line 10) | Employer FICA, unemployment tax | Follows salaries | Salary dollars by function |
| Fees for services: legal, accounting, other (lines 11b, 11c, 11g) | Audit fee, legal, consultants | Audit and general legal to M&G; program consultants to program | Direct coding by invoice |
| Professional fundraising services (line 11e) | Campaign counsel, telemarketing firm | Fundraising | None |
| Office expenses (line 13) | Supplies, postage, printing | Direct where possible | Headcount for general supplies |
| Information technology (line 14) | Software subscriptions, IT support | Split across functions that use it | Users, headcount or usage |
| Occupancy (line 16) | Rent, utilities, repairs | Split | Square footage |
| Travel (line 17) | Mileage, airfare, lodging | By purpose of trip | Direct coding on expense report |
| Conferences, conventions and meetings (line 19) | Board meetings, program trainings | Board and staff meetings to M&G unless program-specific | Direct coding |
| Interest (line 20) | Loan and line of credit interest | Follows use of the debt | Square footage for a building loan |
| Depreciation and amortization (line 22) | Building, equipment, vehicles | Split | Square footage or asset location |
| Insurance (line 23) | General liability, D&O, program liability | General liability to M&G; program policies to program | Direct coding by policy |
| Other expenses (lines 24a to 24e) | Bank fees, dues, bad debt | Case by case | Document each item |
Part B: Statement layout (illustration). The figures below are an illustration for a fictional nonprofit with $2.03 million of expenses, not benchmarks. In your own version, split Program services into one column per major program if you run more than one.
| Natural expense | Program services | Management and general | Fundraising |
|---|---|---|---|
| Salaries and wages | $820,000 | $190,000 | $110,000 |
| Employee benefits | $123,000 | $28,500 | $16,500 |
| Payroll taxes | $62,730 | $14,535 | $8,415 |
| Grants to other organizations | $200,000 | $0 | $0 |
| Professional fees | $40,000 | $52,000 | $18,000 |
| Occupancy | $144,000 | $24,000 | $12,000 |
| Information technology | $36,000 | $9,000 | $5,000 |
| Travel | $22,000 | $3,000 | $5,000 |
| Printing, postage and supplies | $10,000 | $6,000 | $14,000 |
| Depreciation | $32,000 | $6,000 | $2,000 |
| Insurance | $12,000 | $8,000 | $0 |
| Total expenses | $1,501,730 | $341,035 | $190,915 |
| Share of total ($2,033,680) | 73.8% | 16.8% | 9.4% |
In this illustration, benefits are 15% of salaries and payroll taxes are 7.65% of salaries in every column, so both follow salaries exactly. Occupancy of $180,000 is split 80%, 13.3% and 6.7% on square footage. Each row total in your added Total column must equal the balance of the mapped natural accounts in your trial balance.
Walking through each part of the template
Natural expense rows
Build the rows from your chart of accounts, not from memory. Using the Form 990 Part IX line titles from the IRS 2025 Instructions for Form 990 (page last updated April 30, 2026) keeps the GAAP statement and the tax return on one mapping. ASU 2016-14 also requires expenses you report under another caption, such as cost of goods sold or the costs of a gala netted against event revenue, to be broken out by nature within the analysis (Yeo & Yeo, April 18, 2017).
Program services columns
Program services are the activities that carry out your exempt purpose. Program costs include direct conduct and direct supervision of a program, but not general overall supervision, so an executive director’s time counts as program only when they directly manage program staff (Yeo & Yeo). If you run several programs, show each in its own column; donors, auditors and your board will usually ask for that level of detail.
Management and general column
ASU 2016-14 redefined management and general as supporting activities that are not directly identifiable with one or more program, fundraising or membership-development activities (PKF O’Connor Davies, no date shown). The IRS instructions list board meetings, general legal services, accounting, general liability insurance, office management, auditing, human resources and the annual report as column (C) costs. Financial reporting for grants is also management and general under the ASU, which raised reported overhead at many organizations when they adopted it (Yeo & Yeo). Management and general on this statement is a GAAP reporting category and is not the same thing as an indirect cost rate on a federal award; for that calculation, see our guide to the de minimis indirect cost rate.
Fundraising column
Fundraising covers soliciting cash and noncash contributions, gifts and grants, including allocable overhead. One exception catches people out: costs of securing a grant or contract to perform a service that meets the funder’s specific needs are program costs, not fundraising (IRS Instructions for Form 990). If a mailing combines a donation appeal with genuine program education, the joint costs can be split only if you meet the purpose, audience and content criteria in FASB ASC 958-720, and the IRS lets you check the SOP 98-2 box on Part IX line 26 only if you followed those rules.
Allocation basis column
Every shared cost needs a stated basis. The common bases are time, square footage, usage and headcount (Wegner CPAs, February 25, 2026). The ASU requires you to disclose the methods you used to allocate costs among program and support functions (PKF O’Connor Davies). For how to choose and document each basis, see our guide to functional expense allocation methods.
Tie-outs to the ledger and to Form 990
Your statement total must agree to total expenses on the statement of activities. Your Form 990 Part IX total will often differ, and you should keep a reconciliation of the reasons. Three items cause most differences:
- Special event direct costs. GAAP includes them in the analysis by nature. The IRS wants direct event expenses on Part VIII line 8b and excluded from Part IX.
- Investment expenses. Under the ASU, external and direct internal investment expenses are netted against investment return and left out of the analysis (Yeo & Yeo; Tammy Ricciardella of BDO, Spring 2017, reprinted by Templeton & Company). The IRS requires investment management expenses in column (C).
- Cost of goods sold and rental costs. These go on Part VIII lines 10b and 6b of the return, not Part IX.
Only 501(c)(3) and 501(c)(4) organizations must complete the functional columns (B) to (D) of Part IX; other filers must complete column (A) and may complete the others. Form 990 is required when gross receipts are $200,000 or more or total assets are $500,000 or more, and smaller organizations may file Form 990-EZ instead (IRS Instructions for Form 990).
Common mistakes
- Allocating at year-end from estimates. If staff time is not recorded during the year, the allocation is a guess your auditor cannot test. Collect time and effort data at least monthly.
- Rounding a split into one function. The IRS example is explicit: an employee who spends 40% of time on fundraising and 60% on programs must be split 40/60, not reported 100% as program because program time is over half.
- Leaving the CEO entirely in management and general. Direct supervision of programs or fundraising should be allocated out. General oversight should stay in management and general.
- Treating human resources as program cost. The ASU’s examples generally keep the human resources department in management and general because it supports the whole entity (BDO, via Templeton & Company).
- Changing bases each year without saying so. Apply methods consistently and review them annually (Wegner CPAs). A change in basis changes your program ratio and should be explained to the board.
- No reconciliation between the audit and the 990. Without a written list of reconciling items, your program percentage on the return will not match the audit and readers will notice.
When to move from a spreadsheet to software
A spreadsheet works when you have one or two programs, few shared costs and a single allocation entry at year-end. Move the work into your accounting system when monthly reporting by function matters to your board or funders, when allocations take days, or when grants require costs tracked by program and award. Our comparison of nonprofit accounting software covers pricing and fit in more depth.
QuickBooks Online. A QuickBooks team member confirmed in the Intuit community on June 12, 2025 that QuickBooks Online does not offer a Statement of Functional Expenses report; the suggested workaround is class tracking and the Statement of Activity. Classes are available only on Plus (40 classes and locations combined) and Advanced (unlimited), per Intuit’s usage limits page updated August 5, 2026. If you are reaching those limits, our guide to QuickBooks alternatives for nonprofits covers the switch.
Sage Intacct. Sage Intacct’s nonprofit financial reports include a “990IX Statement of functional expenses” report, but you must first build dimension groups and structures and point the Program service, Management & general and Fundraising columns at them (Sage Intacct help, last modified October 1, 2026). Shared costs can be spread with Dynamic Allocations, which requires its own subscription and generates the allocation journal entry from a basis such as salary account balances.
Oracle NetSuite. NetSuite’s nonprofit financial reports include a Statement of Functional Expense run from the NFP Financial Center with a “Functional Expense (Custom)” column. The help page says the report assumes 72-series expense accounts and is designed for US subsidiaries; with a different numbering you must copy and edit the report (Oracle NetSuite help, no date shown).
Blackbaud Financial Edge and Aplos. Blackbaud’s Financial Edge help lists a Statement of Functional Expenses report, though the page still cites FASB Statement 117, the standard whose presentation rules ASU 2016-14 updated (no date shown). Aplos, which sells nonprofit accounting software, says its system tags transactions with 990 categories and produces a functional-category report (Aplos, October 31, 2025). Add-on tools such as Velixo, which sells Excel reporting for Sage Intacct, target organizations whose allocations still live in spreadsheets (Velixo, November 17, 2025).
How we researched this
We read the current IRS Instructions for Form 990 Part IX and guidance on ASU 2016-14 from PKF O’Connor Davies, Yeo & Yeo and BDO. We reviewed the top-ranking pages for this term from Wegner CPAs, Sage, Aplos and AccountingTools, and checked each software claim against the vendor’s own help documentation on October 7, 2026. Vendors that sell the products discussed are identified as such. The figures in Part B are an illustration.
Related guides
- Statement of Activities: Nonprofit Template and How-To
- NICRA: How Negotiated Indirect Cost Rates Work
- Form 990-T: Filing Rules and Pulling UBTI From the Ledger
Frequently asked questions
Is a statement of functional expenses required for all nonprofits?
Under ASU 2016-14, every not-for-profit following US GAAP must present an analysis of expenses by nature and function in one location. That location can be the face of the statement of activities, a separate statement or the notes, so a standalone statement is one option rather than a requirement. A separate supplementary schedule no longer satisfies the rule (PKF O’Connor Davies; BDO, via Templeton & Company).
What is the difference between natural and functional expenses?
Natural classification describes what you bought, such as salaries, rent or travel. Functional classification describes why you spent it: program services, management and general, or fundraising. The statement crosses the two so each dollar appears once by nature and once by function.
Is the statement of functional expenses the same as Form 990 Part IX?
They use a similar grid but follow different rules. GAAP includes special event direct costs and excludes investment expenses netted against return, while the IRS does the reverse for both. Keep a written reconciliation so the totals can be explained.
How do you allocate the executive director’s salary?
Allocate it on documented time and effort. Time spent directly supervising programs or fundraising goes to those functions, and general oversight of the organization stays in management and general. The IRS instructions take the same approach for the CEO and staff.
Can QuickBooks produce a statement of functional expenses?
QuickBooks Online has no built-in report for it, according to a QuickBooks team reply from June 12, 2025. Many organizations use classes for functions on the Plus or Advanced plan, run reports by class and finish the statement in a spreadsheet.
How often should you prepare it?
GAAP requires it with your annual financial statements. Preparing it monthly or quarterly from the ledger makes the year-end version faster and lets your board see the program ratio during the year rather than after the audit.
Sources
- Internal Revenue Service, 2025 Instructions for Form 990, Part IX, page last reviewed or updated April 30, 2026.
- PKF O’Connor Davies (Mark Piszko), Functional Expense Reporting Gets a Facelift, no date shown.
- Yeo & Yeo (Wendy Thompson), Functional Expense Changes Under FASB ASU 2016-14, April 18, 2017.
- Tammy Ricciardella, BDO Nonprofit Standard, reprinted by Templeton & Company, A Deeper Dive into ASU 2016-14 Implementation Issues, Part Two, Spring 2017.
- Wegner CPAs, The Statement of Functional Expenses, February 25, 2026.
- Sage Intacct help, Financial reports and graphs for nonprofit organizations, last modified October 1, 2026.
- Sage Intacct help, Account allocation example: fringe expenses, last modified October 1, 2026.
- Oracle NetSuite help, Statement of Functional Expense, no date shown.
- Intuit QuickBooks Community, Statement of functional expenses thread, QuickBooks team reply, June 12, 2025.
- Intuit, Learn about usage limits in QuickBooks Online, updated August 5, 2026.
- Blackbaud, Financial Edge help: Statement of Functional Expenses, no date shown.
- Aplos (sells nonprofit accounting software), Statement of Functional Expenses, October 31, 2025.
- Velixo (sells reporting add-ons), Functional expense tracking for nonprofits, November 17, 2025.
Sherman Hsieh
Independent analysis of enterprise software — ERP, CRM and more
