Managing a nonprofit’s finances requires more than just keeping track of income and expenses. Nonprofit bookkeeping needs to track how funds are allocated across different functional areas, such as programs, fundraising, and administrative activities. This is especially important for compliance with financial reporting standards, like those set by the IRS and Generally Accepted Accounting Principles (GAAP), which require accurate reporting on functional expenses.
QuickBooks offers an excellent solution for nonprofits to manage their functional expenses by using classes. Classes in QuickBooks allow organizations to categorize and track transactions by specific segments, making it easy to generate detailed nonprofit financial reports that break down expenses into the required categories.
Here’s a step-by-step guide on how to use classes in QuickBooks so your nonprofit bookkeeping can effectively track functional expenses.
Step 1: Understand Functional Expense Categories
Before diving into QuickBooks, it’s important to have a solid understanding of what functional expenses are and why they matter. In the nonprofit world, functional expenses are broken down into three main categories:
- Program Services: These are the expenses that are directly related to the organization’s mission and the services it provides.
- Management and General (Administrative): These expenses are associated with the overall management and administration of the organization, such as accounting, legal fees, and general office expenses.
- Fundraising: Expenses related to activities and campaigns aimed at raising funds for the nonprofit.
Step 2: Set Up Classes in QuickBooks
Step 2.1: Enable Class Tracking
To start using classes in QuickBooks, you first need to enable class tracking. Here’s how:
- Log in to your QuickBooks account.
- Click on the Gear icon in the top-right corner of your dashboard.
- Under the Your Company section, click Account and Settings.
- In the Advanced tab, find the Categories section.
- Click the Edit icon (pencil) and toggle on the option for Track Classes.
- Save your settings.
Step 2.2: Create Classes for Functional Expenses
Next, you need to create the specific classes that correspond to your functional expense categories:
- Click on the Gear icon again.
- Under the Lists section, select All Lists.
- Click on Classes.
- In the upper-right corner, click the New button to add a new class.
- Create classes for each functional expense category, such as:
- Program Services
- Management and General (Administrative)
- Fundraising
- For more granular tracking, you can even create subclasses for specific programs or departments within your organization.
Step 3: Categorize Transactions by Class
Now that your classes are set up, you can begin categorizing your transactions based on functional expenses.
Step 3.1: Record Expenses
When entering expenses into QuickBooks, you’ll assign them to the appropriate class:
- Go to the + New button, and choose Expense or Check, depending on the type of transaction.
- Enter the transaction details, including the vendor, date, and amount.
- In the Class field, select the appropriate class (e.g., Program Services, Administrative, or Fundraising).
- Save the transaction.
Step 3.2: Split Transactions by Multiple Classes
Some transactions might cover multiple functional areas. For example, a single expense might partially support program services and also include administrative costs. QuickBooks allows you to split transactions across multiple classes:
- Enter the transaction as you normally would.
- In the Category Details section, click Add Lines to split the expense.
- For each line, enter the relevant expense amount and assign the correct class.
Step 4: Run Class-Based Reports
Once you’ve categorized your transactions using classes, you can generate reports to see how expenses are allocated across functional areas. QuickBooks offers several reporting options that will help you analyze and report on functional expenses.
Step 4.1: Profit & Loss by Class
To get an overview of your expenses categorized by class, you can run a Profit & Loss by Class report:
- Go to the Reports section.
- In the search bar, type Profit & Loss by Class.
- Select the report and customize the date range if necessary.
- The report will display income and expenses categorized by the classes you’ve set up, giving you a clear breakdown of how funds are being spent across programs, administration, and fundraising.
Step 4.2: Statement of Functional Expenses
For nonprofits, the Statement of Functional Expenses is a required report for many grant applications and compliance purposes. You can generate this report by customizing the Profit & Loss by Class report.
- After running the Profit & Loss by Class report, click on Customize.
- Add or remove filters to display the exact data you need, such as expense categories or specific date ranges.
- Once the report is ready, you can export it to Excel or PDF for easy sharing with stakeholders, donors, or auditors.
Step 5: Review and Adjust Class Usage Regularly
To maintain accuracy in your functional expense tracking, it’s important to review your class usage periodically. Make sure that every transaction has been assigned to the correct class, and ensure that expenses are properly split when necessary.
Regularly reviewing your financial reports will help you identify any misclassifications or adjustments that need to be made.
Conclusion
Tracking functional expenses is essential in nonprofit bookkeeping to meet financial reporting requirements and provide transparency to donors and stakeholders. By using QuickBooks classes, you can easily categorize and monitor expenses across different functional areas, such as program services, administration, and fundraising.
Once you’ve set up class tracking and become familiar with categorizing transactions by class, you’ll be able to generate detailed reports that clearly show how your nonprofit’s funds are being used—ensuring compliance and giving you the financial insights you need to operate effectively.
With these steps, your nonprofit will be well on its way to mastering functional expense tracking in QuickBooks! Contact us today if you would like support with your nonprofit bookkeeping!