While accounting for your company’s activity, certain expenses will support all of your company’s activities, whether for Program, Fundraising, or Management. Booking these expenses to just one of these three main areas of expense would not be accurate. Rent and Office Supplies are two common examples of what we refer to as a “Shared” expense. Shared expenses don’t stay “shared”; they are routinely split out, or allocated, to Program, Fundraising, and Management.
A Shared Allocation is a general journal entry that moves expenses for a closed period from the Shared department into the Program, Management and Fundraising departments. For more on departments, see How Sutro Li uses departments.
The method that Sutro Li uses to allocated Shared expenses is as follows:
- Book all income and expense to a department, either Program (or a sub-department of Program), Management, Fundraising or Shared.
- Allocate salaries according to effort reporting. (For more on this, see Payroll allocation)
- Calculate the ratio of direct expenses for each department or sub-department. Allocate Shared expense within each expense account according to this ratio.
Direct expenses are expenses that can accurately be fully booked to Program, Management, or Fundraising; in other words, they are the expenses that are not initially booked to Shared. Indirect expenses are initially booked as Shared and later moved with a Shared Allocation.
Here is an example of how the ratios of direct expense would be calculated for a shared allocation. Over a given quarter, let’s say the total expenses in each department are as follows:
Total of direct expenses (Program + Fundraising + Management) = $1,000
The ratios of direct expenses would be as follows:
Program: $700 / $1,000 = 70%
Fundraising: $140 / $1,000 = 14%
Management: $160 / $1,000 = 16%
And the Shared cost of $100 would be allocated as follows:
Shared allocated to Program: $100 x 70% = $70
Shared allocated to Fundraising: $100 x 14% = $14
Shared allocated to Management: $100 x 16% = $16
This will fully reduce Shared to $0 and result in the following totals:
Program: $700 + $70 = $770
Fundraising: $140 + $14 = $154
Management: $160 + $16 = $176
Note that these percentages are calculated from the ratios of total direct expenses and applied at the expense account level. For example, if the Rent expense account has $10 in Shared expense, $7.00 of Rent expenses will be allocated to Program, $1.40 will be allocated to Fundraising, and $1.60 will be allocated to Management.