Our method for departmental coding is directly related to the Statement of Functional Expenses (SFE) on IRS Form 990, the annual tax return required for all 501(c)3 non-profits. In Xero, we do this with a Tracking Category called Department. In QuickBooks, we do this with Classes. For more info on the SFE and departments, see Statement of Functional Expenses (SFE). This is a core concept that dictates how we handle income and expense coding. It is also central to the Shared Allocation, Payroll Allocation, and release of Temporarily Restricted Net Assets (TRNA).

There are four categories we use in the department system:

  1. Program (including sub-departments for individual program areas)
  2. Fundraising (also known as Development)
  3. Management (also known as Administration)
  4. Shared

Here’s a quick guide to how we use these four departments:

Department Income Expense Notes
Program Restricted funding for a specific purpose, later used to calculate TRNA. Costs related to the tax-deductible mission of the organization. Funders like to see a high ratio of an org’s expense in Program, because they feel their donation will go towards its mission rather than its overhead.
Fundraising General unrestricted income. Costs for raising funds. Funders prefer a low ratio of fundraising expense.
Management Restricted funding for capacity building, later used to calculate TRNA. Costs related to financial admin and board meetings. Funders prefer a low ratio of management expense.
Shared Not used for income. Indirect costs that cannot be booked to Program, Fundraising or Management. Expenses initially booked to Shared are later moved to the other three classes in a Shared Allocation.

Alex Nitta

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