Nonprofit organizations and for-profit businesses are distinctly different entities. Their differences begin with their core missions—nonprofits exist to meet society’s needs, while for-profit businesses exist to make a profit—and continue into their accounting methods.
While these two entities’ accounting requirements share the same objective—transparent and accurate financial disclosure—what each must report to the government is quite different.
From tax status to net assets, we’ve tallied up some key accounting differences between nonprofit and for-profit organizations:
- Tax status
Once approved by the Internal Revenue Service (IRS) as (501(c)(3)s, nonprofits are exempt from paying federal income taxes. State and local taxes, however, vary from state to state and city to city. Only taxes secondary to a nonprofit’s scope, such as real estate or sales tax, are assessed by the IRS in addition to allowing individuals who donate to nonprofits a tax deduction at the end of the year. For-profit corporations are subject to income taxes at the local, state, and federal level.
- Balance sheet vs. statement of financial position
Both for-profit businesses and nonprofit organizations must prepare financial statements, but the presentation and terminology of each greatly differs, starting with balance sheets. For-profit’s financial statements typically prepare a balance sheet every quarter, which includes something called owner’s equity (for sole proprietorship) or stockholders’ equity (for corporations) and its assets (what the company owes) minus its liabilities (what it owes to others). Since nonprofits do not have owners, they instead prepare a statement of financial position, which states the organization’s net assets (assets minus liabilities).
- Income statement vs. statement of activities
For-profit businesses must create an income statement—also referred to as a profit and loss statement—that breaks down revenues, expenses, gains, and losses. This will illustrate to investors, potential creditors, and others that a corporation has experienced a net income or net loss during a specified period of time. Nonprofits, on the other hand, must produce a statement of activities (or SOA), which focuses on the entire organization versus just the funds of that organization. Revenues must be listed (from sources such as grants, contributions, and membership dues) as well as expenses. Whether it’s a surplus or a loss, the difference between these two elements illustrates the organization’s net assets.
- Net assets
The net assets are broken down differently depending on if an organization is nonprofit or for-profit as well. In for-profit businesses, net assets are simply defined as total assets minus total liabilities, what remains Is profit. Nonprofits’ net assets, however, are broken down into three categories—unrestricted, temporarily restricted, and permanently restricted—each governed by strict stipulations that dictate how each can be utilized.
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*Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, 2017–2018 Edition, Accountants and Auditors, on the internet at www.bls.gov/ooh/home.htm.
Walden University is accredited by The Higher Learning Commission, www.hlcommission.org.