The Difference in Accounting – For-Profit and Nonprofit Organizations
So you may or may not have heard this, but, our colleges officially converted to a 501(c)(3) nonprofit organization! We’re super excited about what this means for our students in terms of scholarships, being able to receive donations, grants, and other forms of financial aid to pass along to our students, but practically, this includes a lot of re-training, re-organizing, and re-structuring for many departments that handle the business side of things… particularly the accounting department.
The over-arching goals of all accountants, whether for-profit or nonprofit, is to report a summary of the organization’s financial performance. To answer how’s the company doing financially? This is done through financial statements.
For-profit corporations use the:
- Income Statement to demonstrate how the net profit was calculated
- Statement of Owners’ Equity to calculate how much the owner’s stake, or value, in the business changed
- Balance Sheet to get an understanding of the company’s financial position at a certain point in time: How much debt do they have? How much cash do they have on hand and how easily will they be able to pay the debts due in the upcoming financial period? Are they financially healthy or not?
Well, for nonprofit organizations, all this information is required, plus some more.
The financial statements required of nonprofits are the:
- Statement of Financial Position, which is comparable to the Balance Sheet. However, since there are no owners (it’s non-profit, and the purpose of the organization is to do good in society, not make a profit for the shareholder) there is no Statement of Owners’ Equity, and the Statement of Financial Position covers Assets, Liabilities, and “Net Assets”
- Statement of Activities, which is comparable to the Income Statement – how well can the organization cover their expenses?
Some nonprofits also have to report a Statement of Functional Expense that clearly spells out what expenses are for program services, and what are for support services.
Nonprofit organizations are tax exempt, which means they are not required to pay income tax on any donation receipts or any revenue they generate. They’re supposed to charge their customers sales tax if they sell anything retail (which they will pass on to their state tax agency) but they are not required to pay sales tax on any merchandise they purchase for themselves.
Nonprofits also have to state the classification of donations they receive, whether donations are unrestricted, temporarily restricted, or permanently restricted. This ensures that donors who have certain conditions, such as “These assets can only be used for program improvements,” or “These donations have to be used for building a student center,” or “This grant has to be used to hire someone that is in charge of a brand new department” can see that it will be used for those purposes.
To see sample transactions and how they would be recorded in a journal, click here. Go forward and backwards to read more about Accounting for Non-Profits from AccountingCoach.com
This is one more example of how accountants have to be agile, think critically, and be able to adapt to changes. The founding principles of Accounting are always the same; the execution depends on so many other details that can only be learned and mastered over time. This is proof that Accounting is fun for those who like a challenge, like learning new things, and working out their mental muscles. If this is you, let us know so we can tell you more about our program, and see if this is a good fit for you.