Our Chart of Accounts Grand Tour now winds its way into nonprofit expenses. Nonprofit expenses are in many ways similar to those of a regular for-profit company. Payroll, office supplies, rent, and other expenses are commonly found in nonprofit organizations. This post will give an overview of the nonprofit expense landscape, starting with…
Distinguishing Expense Accounts from Income Accounts
It’s surprising to us how often people record expenses into income accounts and vice versa.
For example, income received for a program luncheon is recorded directly to the expense account used to record catering expenses. It would be better to record the luncheon income to a program service income account and record the expenses to expense accounts. While there are some situations in which income and expenses are netted against each other for presentation purposes, for bookkeeping purposes you should record income and expenses to separate accounts.
Notice in QuickBooks (Online or Desktop) the expense accounts (also referred to as expenditure type accounts) are located at the end of the chart of the accounts. Income (or revenue) type accounts are listed just before the expense accounts. Noticing the account type can help you select the right account to record a transaction.
Fundraising Event Expenses
Expenses of fundraising events are one of those expenses that are netted against event revenue, though they are still recorded to a separate account. In the last two posts (Part I and Part II) we covered accounting for special events.
One unique aspect of nonprofit expenses is the requirement on Form 990 and in Generally Accepted Accounting Principles (GAAP) to report expenses by natural and functional classification. Actually functional classification is not so different from for-profit companies that track expenses by department. For example, a company that does landscaping and pool maintenance could use Classes in QuickBooks to assign expenses to the appropriate department.
Natural classification uses the chart of accounts and includes categories like
- Office Supplies
- Salaries & Wages
Functional classification means breaking down expenses by the three main functional areas:
- Management & General
Expenses can be assigned to a functional area using a Class in QuickBooks. For more information on functional expenses, see our post Demystifying Nonprofit Overhead and our series of posts on Nonprofit Overhead.
Nonprofits often have in-kind expenses. In-kind expenses are always associated with a like amount of in-kind income. Common sources of in-kind income and expense include:
- Donated goods
- Donated services
- Free or reduced-rate rent
See our post Nonprofit Income Accounts Part 3: In-Kind Donations for more about in-kind donations.
More Uniquely Nonprofit Expenses
Many nonprofits give grants, scholarship and other assistance to individuals and other nonprofit organizations. Grants and assistance are expenses to the nonprofits that provide them.
Nonprofits often incur expenses for supplies related to their programs. For example, a food pantry will have significant expense for grocery items, both purchased and in-kind. It’s helpful to have an expense account for Program Supplies, or perhaps accounts for major categories of program supplies, as distinguished from the account for general office supplies.
Expenses for Form 990 and 990-EZ
Nonprofits required to file Form 990-EZ or Form 990 must report expenses using the format provided by the IRS. It’s helpful to design your organization’s chart of accounts so expense categories will flow easily into the IRS forms. Figuring out how to do this is not hard – on Form 990, look at the Part IX Statement of Functional Expense categories. Also refer to the Form 990 instructions for those lines which provide greater detail about the nature of the expenses to be reported. Now relate that information to the chart of accounts used in your accounting system.
QuickBooks to Go!®
An even easier way to get the expense accounts you need in a format that streamlines reporting for Form 990, audit, and management purposes is QuickBooks to Go!® The organization of the expense accounts allows for collapsed and expanded reporting. The collapsed (summary level) reports are great for your board, and help management get that 30,000 foot view.
In addition to a framework for expenses, QuickBooks to Go!® includes product/service items and documentation of common nonprofit bookkeeping procedures. The file is completely customizable, and comes with tips on how to tailor it for your organization. We offer additional consulting help if you need it. Our goal is to make great nonprofit accounting do-able for you.