Today the Rules of Thumb blog from MoneyThumb would like to address the difference between for-profit and nonprofit accounting. The major difference between the two from a business standpoint is that for-profit organizations are maximizing profits in the interest of owners/shareholders, while nonprofits need to lower costs while raising revenue.
However, not only are the goals and needs of nonprofits different than those of for-profits organizations, their accounting needs are different too. Below we have listed the major differences in for-profit and nonprofit accounting:
Reporting
Nonprofit organizations use different statements and reporting methods than for-profits, though both organizations will produce reports quarterly. The primary goal of a for-profit is to make money, which means that they are required to produce a Balance Statement that details equity and company stock for the owners. They also have to produce an Income Statement, showing the company’s gains, losses, revenue, and expenses.
A nonprofit organization’s reporting differs as their overall objective is to meet a need in society. They are not required to produce a Balance Statement, as they have no owner. Instead, they create a Statement of Financial Position, which outlines the nonprofits net assets, including:
- A list of the values of the assets owned by the organization;
- A list of the values of all debts owed by the organization;
- A list of the organization’s net assets, a section that also effectively states the “value” of the nonprofit.
Again, unlike a for-profit, nonprofits also don’t use an Income Statement. They prepare a Statement of Activities that lists their revenue minus their expenses. Typically, both the revenue and the expenses are grouped by whether they are permanently restricted, temporarily restricted, or unrestricted.
Tax Exemption
For-profits will owe income tax, but in many cases, nonprofit organizations are exempt from income taxes. Any activities that are not directly related to their basic purpose can be subject to tax: for example, sometimes they are responsible for the real estate tax, sales tax, and employee taxes such as Social Security and Medicare. Usually, they are only taxed on items that are secondary to their scope.
While most nonprofit organizations are exempt from income taxes, nonprofits are not tax-exempt by default and their donors’ contributions may not be tax-exempt. To better understand a nonprofit’s tax exemption and donor contribution status, it’s best to contact the Internal Revenue Service (IRS).
Budgeting
Budgeting is a challenge for any organization but can be extremely complex for nonprofit organizations. Budgeting for nonprofits is driven by a mission’s needs and goals and is crucial to the financial stability of the organization. A for-profit may have several budgets representing different perspectives on their financial status or how they wish to operate, including:
- Master budget,
- Operating budget,
- Cash flow budget, and
- Static budget.
Nonprofits often have to deal with overlapping categories and constant budget modifications. A nonprofit’s budget is both a guide for the future and statement of the financial health of the organization, which means that it’s never really set in stone for the year.
The above are the major differences between for-profit and nonprofit accounting. If you are an accountant who handles the books for a nonprofit, the Rules of Thumb blog from MoneyThumb would like to share this free special report from Thomas Reuters to help you stay up-t0-date on changes happening in the nonprofit sector. The report is titled Major Changes for Nonprofit Organizations Just Around the Corner.
The team at MoneyThumb hopes this blog post has helped you better understand the differences between for-profit and nonprofit accounting and that you have a happy weekend.
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