The main difference between for-profit and nonprofit accounting is that for-profit businesses operate under the principles of profit and loss, while nonprofits operate under the principles of social welfare.
What are the differences between nonprofit vs for-profit accounting?
A for-profit company makes a profit for its owners. A nonprofit has two bottom lines. The first goal fulfills its stated mission. The second one provides the necessary funding to support your mission in the present time and the future.
Nonprofit organizations are considered public benefit corporations that receive their revenue from a combination of:
- Donations or grant income
- Donated facilities and equipment
- Low paid or volunteer staffs
Measurement of success between nonprofit and for-profit
- Financial Goals
- Accountability
- Accounting Software
The infographic below illustrates the measurement of success between nonprofit and for-profit accounting. Nonprofit accounting methods differ in terms of accountability and compliance.
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Nonprofit vs for-profit differences in accounting for income and expenses
The types of income and expenses you have will depend on your business. For example, if you are a consultant, you may have income from consulting, speaking engagements, and other consulting-related services. If you are a manufacturer, you may have income from selling products and services, manufacturing, and other manufacturing-related expenses.
- For-profit businesses must report their income and expenses in monetary terms, while nonprofit organizations are not limited by this measure.
- For-profit businesses must file annual financial statements with the IRS, while nonprofits do not have to make these filings unless they choose to do so.
- For-profits must pay taxes on their profits, which can be significant if their income exceeds a certain threshold; however, most nonprofits are exempt from paying taxes on their net earnings (after expenses are paid).
One important difference between for-profits and nonprofits is that for-profit businesses must maintain books and records to demonstrate their compliance with tax laws, while nonprofits are not required to do so. A for-profit company’s chart of accounts typically tracks revenue and expenses related to the sale of products and services in a general ledger.
What are the requirements for nonprofit accounting?
Nonprofit accounting is a field that focuses on the financial aspects of nonprofits. Nonprofits are an important part of the American economy and play a critical role in the lives of millions of Americans. Nonprofit accounting provides an important service to those who are in need.
Fund accounting focuses on accountability and stewardship rather than profitability. These general ledgers also go by the term funds . Funds allow organizations to separate resources into various accounts to identify where those resources came from and how they are used. Since nonprofit organizations receive benefits from being tax-exempt, they must keep detailed records while bookkeeping.
A nonprofit’s accounting system is typically a series of general ledgers, or funds, which enables the organization to track revenue and expenses to a single point of origin. Theoretically, each fund has a separate budget, and this separation in the books ensures the nonprofit is using grants and donations solely for permitted purposes.
Fund accounting can get complicated, depending on your organization’s needs. FASB117 and FIN46 are the IRS resources that outline a nonprofit accounting system’s needs.
Nonprofit vs For-Profit Accounting Regulations
Nonprofits and For-Profit Corporations are two different types of corporations, and they have different legal rights and responsibilities. Nonprofits are not subject to the same financial regulations as for-profit corporations, and they are not required to pay corporate taxes.
For-profit corporations keep a balance sheet that reflects the assets the corporation owns, which can be distributed as retained earnings to shareholders. A nonprofit keeps a statement of financial position, which reflects the assets on hand that can be used to further the mission of the organization. A for-profit uses its accounting system to track net income, whereas a nonprofit tracks the excess of revenues over expenditures.
Understanding these major accounting differences between for-profits and nonprofits can help you avoid surprises and can ensure that your organization meets its financial accountability and transparency requirements under state and federal law.
Nonprofit vs For-Profit Taxes
While all for-profit businesses must pay taxes on their net income, nonprofits are not required to pay income taxes. Nonprofits are only assessed for taxes such as real estate or sales taxes and are required to file IRS Form 990. Filing the Nonprofit Form 990 ensures that charitable organizations are accountable to funding sources.
What is the tax-exempt status of the organization?
The tax-exempt status of an organization is determined by the Internal Revenue Service (IRS). The IRS is responsible for determining the tax-exempt status of the organization. As a 501(c)(3), the organization is not allowed to engage in political activities.
Criteria for tax-exempt status:
- The organization is tax-exempt.
- The organization is a 501(c)(3) nonprofit organization.
- The organization has not had its tax-exempt status challenged or revoked in the last five years.
Viewing a nonprofit’s 990 answers important questions such as revenue sources, sustainability, and how well the organization pays its employees. Potential board members can see who else is on the board and what the cash reserves look like.
A donor’s contribution to a nonprofit organization will qualify as a charitable deduction on the donor’s income tax return. However, there are nonprofits that qualify as tax-exempt but their donors’ contributions do not qualify as charitable deductions (although they may qualify as business expenses).
Free eBook Download: How to Generate Compliant Nonprofit Reports
What are the reporting requirements for nonprofit and for-profit organizations?
Nonprofit organizations are required to file Form 990, which includes information about the organization’s annual and quarterly tax returns, financial statements, and the organization’s plans for the future.
For-profit businesses prepare balance sheets listing it’s owner’s equity. This is broken down by assets, everything the company owns, and liabilities, everything the company owes. A nonprofit generates nonprofit financial statements. They do not use a balance sheet because there are no “owners”. Instead of a balance sheet, a nonprofit generates a statement of financial position, which details assets and liabilities. An accountant can determine the size of the nonprofit by reviewing its net assets.
A for-profit business will prepare an income statement each quarter. This lists its revenue, gains, expenses and losses. This information is used to assess how profitable the company is on a quarterly basis. Since nonprofits are not concerned with profits, they prepare a statement of activities on a quarterly basis. This report lists its revenue minus expenses plus net assets.
What are the differences in financial reports?
For-Profit businesses generate the following financial reports:
- Balance sheet
- Income statement
- Cash flow
- Statement of stockholders’ equity
- Statement of changes in stockholders’ equity
Nonprofit organizations generate the following financial statements:
- Statement of financial position (SOP) – Balance sheet
- Statement of activities – Income statement
- Statement of functional expenses
- Statement of cash flow
A for-profit corporation keeps a balance sheet that reflects the assets the corporation owns, which can be distributed as retained earnings to shareholders. A nonprofit keeps a statement of financial position, which reflects the assets on hand that can be used to further the mission of the organization. Likewise, a for-profit uses its accounting system to track net income, whereas a nonprofit tracks the excess of revenues over expenditures.
Understanding these major accounting differences between for-profits and nonprofits can help you avoid surprises and can ensure that your organization meets its financial accountability and transparency requirements under state and federal law.
Nonprofit vs For-Profit Accounting Software
Off-the-shelf accounting software is a one-size-fits-all solution designed for for-profit use. Since it is not designed for nonprofit accountability, it is extremely limited and restricted for a nonprofit.
You will need to become a magician to make this work for your nonprofit. You know what I’m talking about. How many tricks up your sleeve do you need to get your accounting system to do what you need. And after all that, you still have to take an extra step to dump all your data into a spreadsheet to generate financial reports.
You can either do this the hard way, or you can choose the easy route by getting the right tools for the job.
Schedule a FastFund Online Demo: Learn more about our unique software approach to nonprofit accounting, payroll and fundraising.
Bottom Line
When evaluating a software solution, make sure it provides the tools for the unique requirements of nonprofit organizations. This is how you can become more accountable, cultivate better relationships with your donors, raise more funds and help your nonprofit fulfill its mission.
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Did you find this article useful? We welcome your thoughts and comments.
Very helpful
I actually learned 🙂
Very comprehensive and helpful. Helped me a lot, a through and through for-profit organization professional to understand the basic difference of Non Profit from For Profit.
If accountability is key, why is it so difficult for a for profit or profit for a cause business so difficult to find start up / funding for?
Funding any business, whether it is a for profit or nonprofit is difficult. But, with the proper mission, motivation and motive, it should be easier and part of the plan.
Great writing, I got something new from this.
Thank you for the information. i am interviewing for an accounts payable position at a non profit company which I have never worked for before. This was very good information to hopefully put me above the rest of the candidates. Any addition tips would be great!