ASC 958-720: Functional Expense Allocation Journal Entries for Other Expenses

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Accounting Standards Codification (ASC) Topic 958-720, Not-for-Profit Entities - Other Expenses, provides guidance on the allocation of functional expenses for not-for-profit (NFP) entities under Generally Accepted Accounting Principles (GAAP). Functional expense allocation is an essential aspect of NFP accounting, as it allows organizations to accurately report expenses by function, such as program services and supporting activities. This article will explore the key aspects of functional expense allocation under ASC 958-720 and provide examples of journal entries to help you better understand the accounting treatment.
 

ASC 958-720 Overview

ASC 958-720 requires NFP entities to allocate expenses to their various functions, such as program services, management and general, and fundraising. These allocations should be based on reasonable methods that are consistently applied and documented. Expenses can be either directly attributed to specific functions or allocated using a systematic and rational basis. Program services are the primary activities that fulfill the NFP's mission, while supporting activities include management and general activities (e.g., accounting, human resources) and fundraising activities (e.g., donor cultivation, grant proposal writing). The allocation of functional expenses is essential for providing transparency to donors, grantors, and other stakeholders regarding the use of resources by the NFP.
 

Journal Entries for Functional Expense Allocation

To illustrate the accounting treatment for functional expense allocation, let's consider an example. NFP Organization A incurs the following expenses during the year:
 

• Program Services Expenses: $150,000

• Management and General Expenses: $50,000

• Fundraising Expenses: $25,000
   

Here are the journal entries for NFP Organization A to allocate the functional expenses
 

1. NFP Organization A records the program services expenses:

Debit: Program Services Expenses $150,000
Credit: Various Expense Accounts $150,000

In this case, the organization records the expenses directly attributable to program services.
 

2. NFP Organization A records the management and general expenses:

Debit: Management and General Expenses $50,000
Credit: Various Expense Accounts $50,000

The organization records the expenses directly attributable to management and general activities.
 

3. NFP Organization A records the fundraising expenses:

Debit: Fundraising Expenses $25,000
Credit: Various Expense Accounts $25,000

The organization records the expenses directly attributable to fundraising activities.

 

ASC 958-720 provides guidance on the allocation of functional expenses for NFP entities, ensuring that financial statements accurately reflect the use of resources by the organization. By understanding the accounting treatment and journal entries associated with functional expense allocation, NFP entities can maintain accurate financial records and comply with GAAP. Adherence to the provisions of ASC 958-720 ensures that financial statements accurately reflect the financial position and performance of NFP organizations, providing transparency and comparability for donors, grantors, and other stakeholders. Proper allocation of functional expenses is essential for NFP organizations to demonstrate the efficient use of resources and maintain the trust of their supporters.