Glossary
Financial Reporting

Statement of Functional Expenses

By: Alec Hollingsworth
Updated:  
June 2, 2025

DEFINITION:

A Statement of Functional Expenses details nonprofit costs by both type and function for transparency and compliance.
A Statement of Functional Expenses is a required financial report for many nonprofit organizations in the United States. This statement breaks down an organization's expenses by both their natural classification (such as salaries, rent, or supplies) and by functional category (such as program services, management and general, and fundraising). The purpose is to provide transparency about how resources are allocated and spent, making it easier for stakeholders to assess whether the organization is using its funds effectively to fulfill its mission. By detailing expenses in this way, the report helps donors, regulators, and the public understand where nonprofit dollars are going and supports compliance with IRS and GAAP standards.

Key Takeaways

  • Breaks down expenses by both nature and function
  • Required by U.S. GAAP for many nonprofits
  • Enhances transparency for donors and regulators
  • Supports compliance with IRS and FASB standards

Why It Matters

It ensures transparency and accountability in nonprofit spending, building trust with donors and regulators.

Real World Example

A local food bank prepares its annual Statement of Functional Expenses as part of its audited financial statements. The report shows that $500,000 was spent on program services (food distribution), $50,000 on management and general expenses (office administration), and $25,000 on fundraising activities. Each category is also further broken down by natural classification, such as salaries, rent, and food purchase. This level of detail allows donors to see that most funds are directed toward the organization’s core mission, helping the food bank build trust with supporters and comply with financial reporting regulations.

How Aplos Helps

Aplos accounting software allows nonprofits to easily track, categorize, and report expenses by both natural and functional categories. Users can generate Statements of Functional Expenses directly in Aplos, streamlining compliance and providing insightful, audit-ready reports.
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Frequently Asked Questions

Who is required to prepare a Statement of Functional Expenses?

Most U.S. nonprofits, especially those required to file IRS Form 990, must prepare this statement to comply with accounting standards.

What information does the Statement of Functional Expenses provide?

It details how much was spent on program services, management and general, and fundraising, further broken down by natural expense categories.

How does Aplos help with preparing a Statement of Functional Expenses?

Aplos simplifies tracking and categorizing expenses so nonprofits can generate accurate, compliant Statements of Functional Expenses in just a few clicks.

Why do donors care about the Statement of Functional Expenses?

It helps donors see how much of their contributions go directly to mission vs. administrative or fundraising costs, building transparency and trust.

How often should a Statement of Functional Expenses be prepared?

Typically, nonprofits prepare this statement annually as part of their audited financial statements and IRS filings.

Related Terms

Double‐Entry Accounting
Management & Discussion Analysis (MD&A)
Statement of Activities
Nonprofit Corporation
Tithes
Statement of Financial Position

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