The accounting for nonprofit organizations (NPOs) differs from other entities. Accounting standards require these entities to use a different format when reporting their expenses. On top of that, these standards require them to present those expenses in a specific financial statement. NPOs prepare the statement of activity, where they must divide their costs into several categories.
What are Program Expenses?
Program expenses refer to the costs NPOs incur in delivering a specific program. It includes the expenses associated with running various programs and services. However, a nonprofit can only report those expenses related to its missions under this heading. If a cost does not fall under that mission, NPOs cannot present them under program expenses.
Program expenses include any costs associated with carrying out an NPO’s mission. These expenses differ from one nonprofit to another based on their activities. For most NPOs, program costs are the most prominent expense class in the statement of activities. These expenses make up a significant portion of their total expenses. The more a nonprofit contributes to its mission, the higher its program expenses will be.
How do Program Expenses work?
Every nonprofit organization works towards achieving specific goals. These goals relate to its mission. When working toward that mission, NPOs incur various costs. Sometimes, these costs relate to achieving that mission directly. Accounting standards require companies to classify those costs as program expenses. If they are indirect, they cannot fall under this category.
Program expenses include various types of costs. Usually, they consist of direct costs of resources used to design and implement a program. Furthermore, it contains expenditures related to people associated with that program. NPOs may also incur indirect costs to design and implement a program. However, these do not fall under program expenses in the statement of activities.
How should nonprofit organizations present Program Expenses?
While most other reporting entities prepare an income statement, it does not apply to nonprofits. Instead, these entities report their operations through the statement of activities. Accounting standards for nonprofits require them to present program expenses in this statement. Usually, they also include other types of expenses in this statement.
Furthermore, nonprofits may prepare a statement of functional expenses. This statement details all the costs incurred by a nonprofit during a period. Separating costs based on their function is a crucial part of this statement. Therefore, nonprofits must also present their program expenses in the statement of functional expenses. NPOs also provide a breakdown of these expenses in the notes to the financial statements.
Example of Program Expenses
A nonprofit organization helps provide education to underprivileged students as its mission. Within this mission, it provides academic support to students. Similarly, it distributes resources and materials which aid in their education. Consequently, the nonprofit incurs various expenses.
The nonprofit incurs $100,000 during a period to provide academic support to its students. On top of that, it purchases and distributes educational resources worth $50,000. Since both relate to its mission, they will fall under program expenses. The total program expenses for the nonprofit in this period will be $150,000.
Nonprofit organizations report their operations in the statement of activities. Within this statement, they must separate expenses into various headings. Program expenses include all costs incurred toward an NPO’s mission. Usually, it consists of all the direct costs incurred toward designing and implementing a program.