There are many differences between for-profit and nonprofit businesses as for-profit goals are maximizing profits in the interest of shareholders, while nonprofits need to lower costs while raising revenue. Not only are the goals and needs of nonprofits different than those of for-profits organizations, but their accounting is different too. It’s important for your nonprofit organization to understand your accounting needs order to maximize your resources and spend more time raising awareness for your cause, rather than creating reports and spreadsheets.
For-Profit & Nonprofit Accounting Differences
Here are some of the major differences in for-profit and nonprofit accounting:
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.
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 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 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.
There are many differences in the accounting procedures of for-profit and nonprofit organizations, so that’s why it’s important to use an appropriate accounting system that understands your needs. Abila MIP Fund Accounting, Financial Edge NXT, and DrillPoint Reports all make accounting and reporting easy for nonprofit organizations.