Lesson 1 – Overview



One of the major differences between for profit and nonprofit accounting is the method used to categorize expenses known as direct cost allocations.

Nonprofits are subject to a unique accounting requirement that requires the reporting of expenses according to the purpose for which they are incurred. Allocating costs to functional areas is the cornerstone of a nonprofit’s financial management and reporting. This process is one of the more challenging and misunderstood areas of preparing a nonprofit’s financial statements.

Financial statements prepared under FASB 116/117 break down expenses into the following functional categories: program and support services. Understanding the different functional categories is crucial to accurate functional allocations.

When it comes time to record the expenses incurred by your organization, you may need to develop a direct cost allocation plan to properly distribute expenses to the correct functional area.