Fundamental differences between nonprofit and for-profit accounting

You may know the difference between nonprofit and for-profit accounting systems, but do your newest employees and board members? Not-for-profits and businesses share certain similarities. For example, both must carefully track transactions and produce accurate, timely financial statements. But there are enough differences between the two that you may want to provide training for new board members and staffers who come from corporate backgrounds.

Profit vs. charitable mission

For-profit companies are driven to maximize profits for their owners. Nonprofits, on the other hand, generally want revenue to cover the costs of fulfilling their mission now and in the future.

Their respective financial statements reflect this difference. For-profits report mainly on profitability and increasing assets, which correlate with future dividends and return on investment to owners and shareholders. Nonprofits report on their financial position, stability and expenditures to funders, board members, the community and tax authorities.

Balance sheet vs. statement of financial position

For-profits and nonprofits use different financial statements to report assets and liabilities. For-profit companies prepare a balance sheet that lists the owners’ or shareholders’ equity, which is based on the company’s assets, liabilities and prior profits.

Nonprofits, which have no owners, prepare a statement of financial position, which also looks at assets, liabilities and prior earnings. Resulting net assets are classified as those without donor restrictions and those with donor restrictions. Nonprofits usually are more focused on transparency than are for-profit companies. Therefore, their financial statements and footnotes generally include disclosures about the nature and amount of donor-imposed restrictions on net assets, as well as internal limits set by the board.

Income statement vs. statement of activities

For-profits and nonprofits also take different reporting approaches to revenues and expenses. For-profits produce an income statement (also known as a profit and loss statement), listing revenues, gains, expenses and losses, to help evaluate financial performance.

Nonprofits often rely on grants and donations, in addition to fees-for-service income. So they prepare a statement of activities, which lists all revenues less expenses, and classifies the impact on each net asset class.

Unlike for-profit businesses, nonprofits also prepare a statement of functional expenses. Here, they break down their expenditures (such as salaries and benefits, rent and utilities, and office supplies) into functional categories — program, administration (also referred to as management) and fundraising. This statement often is used to help nonprofits prepare their annual Forms 990 and can provide greater transparency to their donors and supporters.

Other differences

There are other nonprofit financial reporting and accounting concepts that may be important for staffers and board members to learn, depending on their responsibilities. If you have questions or need help educating your stakeholders, contact us.

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