In accounting for nonprofit organizations, the statement of functional expenses and the statement of activities perform two separate if related functions. The statement of functional expenses reports expenses by their nature, such as wages, and functions, such as a program under which the organization incurred them. The statement of activities is the equivalent of the income statement prepared by nonprofit organizations to show the income and expenses for a financial period. Different organizations refer to this statement by various names such as receipts and expenditure statement, the budget report or the profit and loss statement.
Nonprofit organizations present the statement of functional expenses in a matrix form. The column headings show the function of the expense such as programs, fundraising, and management and general, while the rows show the type of expense. The design of the statement of activities has columns for prior year results, budget, year-end forecasts, variances and notes below it giving narrative explanations. Organizations show income by sources, with different subtotals for contributed and earned incomes, and expenses according to activity.
Every nonprofit organization must prepare the statement of activities or the statement of financial activities, just as profit-making organizations must prepare the statement of comprehensive income. However, regular preparation of the statement of functional expenses is not a requirement by the Financial Accounting Standards Board for every nonprofit organization. Although FASB does encourage the preparation of this statement, as it is mainly a subset of the statement of activities.
The statement of activities shows the net surplus or deficit of a nonprofit organization at the end of a fiscal period. This surplus or deficit means an increase or a decrease, respectively, in the net assets of the organization. Comparisons with previous years and previous budgets help management investigate downward trends and unfavorable variances. The intention of the statement of functional expenses is to present the costs the nonprofit organization incurs to complete various programs.
Organizations commonly generate the statement of functional expenses using software developed for nonprofit accounting. The statement of activities contains too much analysis for nonprofit organizations to generate by software that most organizations can afford. Therefore, managers format a report at the start of the fiscal year and link the report to the accounting software that has the unprocessed data. Thus, all that the managers do during the year is to update the forecasts for the year-end.