Certainly the system you choose should meet your internal needs: It should help you understand where the money goes and plan effectively for the future. One rule you might consider is charging all expenses (direct and indirect) to the programs they relate to. This can help you set reasonable program fees, assess financial performance and obtain reimbursement from funders for your full costs. Categorizing expenses consistently and tracking them over time also enables the staff and board to identify trends in income and expenses and plan for their future effects. (Fact sheets on cost allocation are available at www.allianceonline.org/FAQ under Financial Management.)

Financial information, however, is reported to and used by outside parties as well as the museum itself. And the audience for these statements is broad‹it's not just the staff trawling your tax filing to find the director's salary. (Thought that was confidential, didn¹t you?!) It¹s perfectly legitimate to take these outside audiences into account when setting up rules for allocating expenses on your financial statements. One very important outside audience is the Internal Revenue Service. Most museums are not-for-profit corporations. As such, most have also been declared exempt from paying federal taxes. Even so, the IRS still requires tax-exempt charities like museums to submit a detailed annual financial report (Form 990 or 990 EZ) to demonstrate that they are responsible stewards of the resources they hold in the public trust. Watchdog groups like Guidestar and Charity Navigator then use the financial information in these forms to rate museums on their effectiveness as charities.

One key figure the IRS asks for, and watchdog groups examine, is the distribution of expenses between program services (mission-related activities), administrative and general expenses (things like human resources and technology support that are general costs of being in business) and fundraising. The presumption is that an efficient nonprofit will spend as much as possible on program services and as little as possible on administration.

These categories were not developed with museums in mind, and it is not always obvious to which category legitimate museum expenses should be assigned. In deciding how to allocate your costs, you want to consider how the information will be used by audiences outside the museum itself. Otherwise, you could record responsible expenses in a way that is perfectly logical and true, yet presents an inaccurate portrait of your operations. For example, many museums charge their utility expenses to "building maintenance," which in turn is lumped under costs of administration. But why are these bills so high? Because you are running a state-of-the-art HVAC system to care for your collections. The difference between what it would take to heat and cool your building if it just held people and what it costs to make it suitable for collections is a legitimate program-related expense. Taking the same argument a step further, many museums are housed in historic structures and consider the building to be part of the collections. If this is the case, one might reasonably argue that all costs of caring for the building are mission-related.

So, yes, accounting actually can be more than a cynical exercise in making the numbers look good‹you can apply common sense to allocating costs. Other expenditures that might fairly be considered as program rather than administration expenses include costs related to off-site collections storage, the purchase and maintenance of vehicles dedicated to research expeditions, security and housekeeping related directly to the special needs of collections and exhibits and IT related to delivering educational material or to collections documentation. Lastly, you might consider allocating a fair portion of your overhead costs to each of your individual program lines.

Thoughtfully categorizing your expenditures is a legitimate and necessary business practice. Done well, it does not in and of itself constitute "cooking." On the contrary: It reflects an effort to present your financial story accurately.

Now, if your director tells you to book her country club fees under "museum subscriptions and registrations," feel free to write back.