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Knowing the Differences Between Nonprofit and For-Profit Accounting

Accounting
Article
08/27/2015

Just as nonprofit and for-profit organizations differ in their foundational purpose (making money for owners/shareholders vs. furthering a mission), there are several differences in the accounting methods these organizations use. One key difference lies in the presentation of financial statements. Each type of entity uses a different set of financial statements:

For-Profit Financial Statements

  • Balance Sheet
  • Profit/Loss Statement
  • Statement of Cash Flows
  • Statement of Owners' Equity

Nonprofit Financial Statements

  • Statement of Financial Position
  • Statement of Activities
  • Statement of Cash Flows
  • Change in Net Assets

Balance Sheet vs. Statement of Financial Position

The balance sheet and the statement of financial position both include asset and liability sections, but for-profit businesses have a section for owners' equity, whereas the nonprofit organization has a net assets section (nonprofit organizations do not have owners). The net assets section lists sources of funds and is broken down into three areas: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets.

  • Permanently restricted assets are those that the donor gives with the stipulation that the assets can never be used up. For example, assume a donor gives $5,000 in this category. The organization could put the funds in a savings account never to be spent, but they could use the interest the account earns.
  • If the interest is stipulated by the donor to be used for a specific purpose, such as building maintenance, the interest would be classified as temporarily restricted until used.
  • Unrestricted assets have no restrictions on how or if they can be spent and can be used at the organization's discretion for purposes that support the activities of the organization.

Profit/Loss Statement vs. Statement of Activities

A business’ profit and loss statement shows income and expenses with either a profit or a loss as a result. The statement of activates for nonprofit organizations also shows income and expenses, but for nonprofits, income is not derived primarily from sales for goods and services, but rather from sources of funds, such as grants, donations, and fundraising monies. While nonprofit and for-profit businesses may have similar expenses — utilities, rent, payroll, and office supplies, for example — nonprofit organizations also have uses of funds related to their mission, with the net of sources of funds and expenses listed as either a surplus or a deficit.

The Importance of Tracking Donations for Nonprofits

All organizations maintain an accounting system to record and summarize financial information for a variety of purposes, including financial and strategic planning, cash flow management, and financial reporting to external users such as taxing authorities. Nonprofit organizations, however, have an added responsibility of tracking sources of funds and fully disclosing donations received and distributed. Think of this as an extra layer in the accounting system; since funding is typically designated for a specific purpose, the organization must be able to show that the funds were allocated appropriately. This is a reason why it is especially important for nonprofit organizations to use an online accounting system to maintain financial records and ensure the security of those records.

Not everything is different in the accounting methods used by nonprofit and for-profit organizations. For example, both require recording all financial transactions, keeping supporting documentation, and preparing financial statements for internal and external users. But the dissimilarities that do exist are important, so if you are involved with your organization’s accounting and move from a nonprofit to a for-profit business or vice versa, make sure you are aware of what’s required for the type of organization you work for.

 

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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