Key Takeaways:
- Non-profit and for-profit organizations have distinct accounting systems that reflect their different missions: non-profits focus on sustaining their mission, while for-profits aim to maximize profits for owners.
- Key differences include the types of financial statements used and the focus on transparency and reporting, with non-profits prioritizing donor restrictions and functional expenses, unlike for-profit businesses.
You may be familiar with the distinctions between non-profit and for-profit accounting systems, but what about your newest employees and board members? While non-profits and businesses share similarities, such as the need to meticulously track transactions and produce accurate, timely financial statements, there are significant differences between the two. These differences might necessitate specialized training for new board members and staff transitioning from corporate environments.
Profit vs. Charitable Mission
For-profit companies focus on maximizing profits for their owners. In contrast, non-profits aim to generate enough revenue to sustain their mission both now and in the future.
This fundamental difference is reflected in their financial statements. For-profits primarily report on profitability and asset growth, which are linked to future dividends and returns on investment for owners and shareholders. Non-profits, however, focus on their financial position, stability, and expenditures, reporting these to funders, board members, the community, and tax authorities.
Balance Sheet vs. Statement of Financial Position
The financial statements used by for-profits and non-profits to report assets and liabilities differ. For-profit companies prepare a balance sheet that includes the owners’ or shareholders’ equity, derived from the company’s assets, liabilities, and past profits.
Non-profits, which do not have owners, create a statement of financial position. This statement also examines assets, liabilities, and past earnings, but the resulting net assets are classified into those with donor restrictions and those without. Non-profits tend to prioritize transparency more than for-profit companies, so their financial statements and footnotes usually disclose the nature and extent of donor-imposed restrictions on net assets, as well as any internal limits set by the board.
Income Statement vs. Statement of Activities
The way revenues and expenses are reported also varies between for-profits and non-profits. For-profit companies generate an income statement (also known as a profit and loss statement), listing revenues, gains, expenses, and losses to assess financial performance.
Non-profits, which often depend on grants and donations in addition to service fees, prepare a statement of activities. This statement lists all revenues minus expenses and categorizes the impact on each net asset class.
Unlike for-profit businesses, non-profits also produce a statement of functional expenses, which breaks down expenditures (such as salaries, benefits, rent, utilities, and office supplies) into functional categories — program, administration (also known as management), and fundraising. This statement is often used to prepare annual Forms 990 and provides greater transparency to donors and supporters.
Additional Differences
There are other non-profit financial reporting and accounting concepts that may be crucial for staff and board members to understand, depending on their roles. If you have questions or need assistance in educating your stakeholders, feel free to contact us.