You may know the difference between non-profit and for-profit accounting systems, but do your newest employees and board members? Non-profits and businesses share certain similarities. For example, both must carefully track transactions and produce accurate, timely financial statements. However, the differences between the two are worth mentioning and providing training for new board members and staffers who come from corporate backgrounds is advised.

Profit Vs. Charitable Mission

For-profit organizations are driven to increase profits for their owners. Non-profits, on the other hand, generally want revenue to cover the costs of fulfilling their mission now and in the future.

Their respective financial statements reflect this difference. For-profits report mainly on profitability and increasing assets, which correlate with future dividends and return on investment to owners and shareholders. Non-profits report on their financial position, stability, and expenditures to funders, board members, the community, and tax authorities.

Balance Sheet Vs. Statement Of Financial Position

For-profits and non-profits use different financial statements to report assets and liabilities. For-profit organizations prepare a balance sheet that lists the owners’ or shareholders’ equity, which is based on the organization’s assets, liabilities, and prior profits.

Non-profits, which have no owners, prepare a statement of financial position, which also looks at assets, liabilities, and prior earnings. Resulting net assets are classified as those without donor restrictions and those with donor restrictions. Non-profits usually are more focused on transparency than for-profit organizations. Therefore, their financial statements and footnotes generally include disclosures about the nature and amount of donor-imposed restrictions on net assets, as well as internal limits set by the board.

Income Statement Vs. Statement Of Activities

For-profits and non-profits also take different reporting approaches to revenues and expenses. For-profits produce an income statement (also known as a profit and loss statement), listing revenues, gains, expenses, and losses, to help evaluate financial performance.

Non-profits often rely on grants and donations, in addition to fees-for-service income. So, they prepare a statement of activities, which lists all revenues less expenses, and classifies the impact on each net asset class.

Unlike for-profit organizations, non-profits also prepare a statement of functional expenses. Here, they break down their expenditures (such as salaries and benefits, rent and utilities, and office supplies) into functional categories — program, administration (also referred to as management), and fundraising. This statement often is used to help non-profits prepare their annual Forms 990 and can provide greater transparency to their donors and supporters.

Other Differences

There are other non-profit financial reporting and accounting concepts that may be important for staffers and board members to learn, depending on their responsibilities. If you have questions or need help educating your stakeholders, contact us.