Did you know that there are over 1.5 million registered non-profits in the United States?
With the number of not-for-profits continually growing, it is important for employees and founders to understand the ins and outs of accounting for non-profits.
Even if you have experience in the business sector, financing and bookkeeping are drastically different between these two organizational types.
Whether you made the employment switch from for-profit to non-profit, or you founded a new non-profit, there are a few things to keep in mind.
Read on to understand accounting in a for-profit vs. non-profit, and why it matters.
Accounting Differences: For-Profit Vs. Nonprofit
It is well-known that non-profits have a completely different philosophy than the business world, but how this impacts the financial strategy of an organization may not be as clear.
Here are three nitty-gritty ways that accounting and taxation structure is different.
- Percentage Ownership
Likely the biggest immediate difference between these organizations is the ownership.
With for-profits, both individuals and entities can own percentages or shares of the company, and this is known as equity.
The owner’s stock or share of the organization is embedded in the accounting process for businesses.
It is in this way that the partial owners benefit directly from the success and profits of the company, through dividends or disbursement.
However, with a non-profit, there is no ownership. Even the founder or members of the board cannot own any percent of the organization.
Non-profits operate as public trusts, and there are no owner’s equity or retained earnings in any way. There are minor variations in the execution of this based on the state where it is registered, but this rule remains the same.
- Financial Reporting
The way in which finances are reported is also important for accounting purposes.
A business maintains a balance sheet, which would show the assets the organization has.
The retained earnings would be distributed to the shareholders through the balance sheet.
On the other side, a non-for-profit will maintain financial position statement. There are no owners, so they cannot have a balance sheet.
The statement of financial position would show the assets and liabilities of the organization and would list the revenue, losses, gains, and expenses.
This statement would be prepared on a quarterly basis to help further the mission of the organization, and it would not be concerned with revenue so long as the goal can continue.
- Fund Accounting
In business, tracking revenue relates to its products and services.
This general ledger would typically have all the business’s activity in a single place.
On the contrary, a not-for-profit’s income would be from a few different sources, mostly grants and donations.
Due to the fact that grants often come with restrictions to their use, they have to account for these separately.
The overall accounting system of a non-profit organization would, therefore, be a collection of funds for these different points of revenue.
Each ledger would then have a separate budget, and this easily allows them to show where the money is going.
Bookkeeping and Accounting for Non-Profits
All and all, bookkeeping for non-profits is not truly more difficult than for-profits, only different in its approach.
Not-for-profits have special considerations to make regarding their revenue streams, as well as their approach to ownership and liability.
Understand the basics of for-profit vs. non-profit accounting? Consider still bringing in our non-profit program experts.
James P. Richardson, CPA, Inc. is an accountancy firm founded in 1978 that specializes in working with non-profit organizations. No matter what stage your non-profit is in, we understand your needs and serve them. Whether your business is for-profit or non-profit, we make sure it is run efficiently, guided by best practices. Our firm brings a worldview of contribution, determination, and hard work to all client engagements.