Whether you’re a seasoned entrepreneur or you have owned businesses in the past, you must understand that non-profit organisations have a completely different framework when it comes to accounting. Failing to maintain the non-profit’s accounting books according to specific legislation and federal laws can lead to legal liabilities.
The main difference between for-profit and non-profit accounting is that for-profit businesses operate under the principles of profit and loss. In contrast, non-profits operate under the principles of social welfare. A for-profit company makes a profit for its owners. A non-profit has two bottom lines. The first goal fulfils its stated mission. The second one provides the necessary funding to support your mission in the present time and the future.
Non-profit organisations are considered public benefit corporations that receive revenue from donations, donated facilities and equipment, and low-paid or volunteer staff. Some of the fundamental differences between non-profit and for-profit organisations’ success are measured by the financial goals, accountability, and software usage.
For-profit businesses must report their income and expenses in monetary terms, while this measure does not limit non-profit organisations. For-profits must pay taxes on their profits, which can be significant if their income exceeds a certain threshold; however, most non-profits are exempt from paying taxes on their net earnings. For-profit businesses must file annual financial statements with the IRS, while non-profits do not have to make these filings unless they choose to do so.
The reason non-profit accounting is different from other organisations is due to the differences in their financial statements. For-profit businesses generate balance sheets, income statements, cash flow, stockholders’ equity statements, and changes in stockholders’ equity in their financial reports. However, non-profit organisations generate statements of financial position, statements of activities, statements of functional expenses, and statements of cash flows.
A for-profit corporation needs to keep a balance sheet that reflects the corporation’s assets, which can be distributed as retained earnings to shareholders. A non-profit organisation needs to keep a statement of financial position, which reflects the assets on hand that can be used to further the organisation’s mission.
The critical difference between for-profit and non-profit standards is the concept of fund accounting, which focuses on accountability rather than profitability. Whereas a profit entity would have a general ledger, a single self-balancing account, non-profits typically have several general ledgers or funds.
Number Solutions is a Sydney-based accounting consultancy firm specialising in providing accounting and bookkeeping services for non-profit organisations. We strive toward helping promising non-profit organisations in Australia reach their full potential.
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