When you joined your nonprofit, accounting may not have been on your list of new things to learn. However, understanding the key differences between nonprofit and for-profit accounting can help your organization make more informed decisions and better meet your goals.
Nonprofit and for-profit organizations are similar in many ways. Both have to track incoming cash and expenses, create and follow budgets, and generate financial statements. However, to remain a nonprofit and maintain the federal tax exemption that comes with that status, nonprofits require additional accounting compared to for-profits.
Here are the four main differences between nonprofit and for-profit accounting you and your team must know.
4 Differences Between Nonprofit and For-Profit Accounting
When it comes to bookkeeping, nonprofit and for-profit organizations both adhere to generally accepted accounting principles (GAAP). However, there are some key differences:
1. Purpose
The goal of for-profit companies is to make money โ and lots of it. The accounting practices observed by for-profit businesses demonstrate this. Their reporting is geared toward showing investors and owners their profitability and growing assets.
Your nonprofitโs purpose, however, is to fulfill a charitable or socially beneficial mission. The focus is on showing accountability to donors, board members, and the broader community, which can be done through audits and other forms of review.
2. Method
For-profit businesses can spend their money however they want, allowing them to label categories for income and expenses how they choose. By contrast, your nonprofit must create separate funds for donations and expenses for specific goals and causes. This creates layers of accounting that for-profit companies donโt have.
Fund accounting allows nonprofits to track and organize restricted donations (those set aside for a particular goal or cause) and unrestricted donations that can be spent however an organization sees fit. This method makes it possible to track the effectiveness of your programs.
3. Reporting
Accounting for both nonprofits and for-profit companies generates numerous statements. Those of for-profit businesses include the balance sheet, income statement, and cash-flow statement, which indicate the companyโs financial health to investors, lenders, and regulators.
The reporting statements from nonprofits, which include statements of financial position, activities, functional expenses, and cash flow, serve to demonstrate transparency and accountability.
Instead of displaying profits and net worth like the statements of for-profit companies, nonprofit reporting lets donors, regulators, and community members see how your organization is operating and how funds will be used to further its mission in the future.
4. Taxation
One advantage your nonprofit has over for-profit businesses is it doesnโt have to pay certain federal taxes. However, you must file a Form 990 so the IRS can see that your tax-exempt organization is following through on its mission. There are also payroll taxes like Social Security and Medicare, along with state and local taxes in some cases.
How funds are categorized can impact whether your nonprofit must pay certain taxes in certain locales. This tax complexity can present accounting challenges that for-profit organizations donโt have to deal with. While businesses look to minimize taxes, proper tax accounting for your nonprofit can help the organization remain in compliance.
These fundamental differences can be examined from many different angles. But the bottom line is that accounting for nonprofits focuses on promoting transparency and accountability that offers insights to your board, builds trust among donors and the community, and maintains compliance with regulators.
Find a Nonprofit Accountant for Your Organization
Accountants who work with nonprofits understand the importance of accountability and transparency to the organizationโs mission and the associated complications that can arise. At Ernst Wintter & Associates LLP, we know how accounting can be a primary driver of success. If youโre looking for an accountant or auditor to help further your objectives, contact us today.
