Natural expenses are line items that show how money was spent: salaries, printing, rent, depreciation, etc. Functional expenses group expenses according to their purpose - why the money was spent. The Cultural Data Profile (CDP) uses three functional expense categories: Program, Management and General, and Fundraising. These are the categories used by the IRS Form 990 (the federal information return for tax-exempt organizations). They are mandated by accounting rules and are a required part of all audits and financial reviews conducted by independent public accounting firms. To fill out the expense sections of the CDP, use your internal financial statements as your guide.
Make sure that the method you choose to allocate your expenses can be replicated from year to year. The best way to do this is to keep careful notes about your cost allocations, which you may enter in your CDP using the Notes feature on each line.
The goal of entering expenses in this detailed manner is to create a clear and accurate snapshot of your organization for your funders and other stakeholders, including your staff and donors. If you are new to bookkeeping, accounting, or cost allocations, ask for help from the individuals at your organization who are most familiar with your finances. They can help you develop allocation methods that are reasonable and replicable from year to year.
This short video clip will help with the best practice for entering a long list of expenses:
From: Webinar Series: What You Need to Know About the New CDP Survey, The Basics