Nonprofit and For Profit Accounting Differences

Posted on Wednesday, June 04, 2014

In both nonprofit and for profit accounting, the goal is the same – to provide accurate and timely financial information to users for decision making.   There are significant differences though between accounting for nonprofit and for profit entities starting with what the users of the financial statements are focused on.  For profit stakeholders are focused on profitability and the bottom line while nonprofit stakeholders are more concerned with achieving the organization’s mission and allocation of resources.

While the basic information contained in each type of entity’s financial statements is the same, the terminology used is different.  A for profit balance sheet shows assets, liabilities and retained earnings.  A nonprofit statement of financial position shows assets, liabilities and net assets.  A for profit income statement shows revenues less expenses, which equals net income (or loss).  A nonprofit statement of activities shows revenues less expenses, which equals the change in net assets

Beyond terminology, there are also some key differences in the recording of financial activity that are specific to nonprofits.

Contributions.  Similar to for profit entities, nonprofit organizations may receive earned revenue through an exchange transaction in which the other party receives a direct tangible benefit; however, unlike for profit entities, nonprofits also receive contributions (nonreciprocal support).  Generally, contributions are recognized in revenue in the period received.  An unconditional promise to give a contribution is recorded when the promise is made.  A conditional promise to give a contribution is recorded when the condition has been met.  Also see Promises versus Intentions.

Restricted Contributions.  Nonprofits may receive contributions with donor-imposed restrictions which limit the use of the funds to a specific purpose or time period.  Restricted contributions must be recorded by type – permanently restricted or temporarily restricted.  Also see Restricted Contributions.

In-kind Contributions.  Nonprofit organizations can also receive noncash contributions of goods and services called in-kind that are used in the ordinary course of doing business.  In order for the organization to have a true cost of operating the organization, these in-kind contributions need to be recorded by the nonprofit.  In-kind contributions are recorded in revenue at fair value as of the date of the gift with an offsetting entry to an expense account, which will result in no effect to the change in net assets.  Sometimes in-kind contributions may be recorded to an asset, which increases the change in net assets. 

Functional Expenses.  Nonprofits are required to report expenses by functional classification – program, management and general, and fundraising.  In addition, health and welfare organizations are required to include a statement of functional expenses as part of their financial statements.  Functional reporting provides a tool used to determine if the nonprofit is using its resources efficiently.  Also see Functional Expenses.

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

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