Photo by Glenn Carstens-Peters
Are you working for a nonprofit?
There are many benefits of being a part of a nonprofit company. For example, nonprofit works to benefit the lives of others. A lot of nonprofits conduct outreaches and resources for the community.
There are a lot of fundamental differences between for-profit and nonprofit companies. However, one big difference is in accounting. Though both types of companies share the basics, the major differences are both legal and financial.
Read on to learn the five key differences between for-profit and nonprofit accounting.
1. Difference in Reporting
Both for-profit companies and nonprofit companies report quarterly, though nonprofits use different statements.
A for-profit company’s goal is to make money, so every quarter they will report earnings to investors or customers. Non-profits have to show progress in other ways.
Nonprofits report by creating a Statement of Financial Position. For example, this can include net assets and liabilities. These assets can be money in checking accounts, collections of artifacts, or even long-term investments.
2. Tax Status
This is probably the biggest difference between for-profit and nonprofit companies.
Nonprofits can acquire tax exemption from federal income taxes, whereas for for-profit companies are required to pay a federal income tax. Nonprofits, in some cases, are still required to pay sales tax and property tax if applicable, but once they are approved by the IRS they are exempt from income taxes.
3. Budgeting Needs
A nonprofit’s budget needs can vary depending on what its mission has in store. For for-profits, their budget is usually dependent on how much income they have acquired. If they have made a significant amount of income, they may use that to expand their business.
Since nonprofits are mission-based, every cause may have a different target budget. Fundamentally, this changes their budgeting needs.
4. Different Terminology
Since nonprofits and for-profit companies are extremely different this will reflect in their reporting as well. It is best to learn these differences so you can understand and analyze their financial information.
For example, for a nonprofit, a statement of activities is the “equivalent” to a for-profit’s income statement. Additionally, a for-profit’s balance sheet is the “equivalent” to a nonprofit’s statement of financial position.
It is very important to know the terminology differences between nonprofit accounting and for-profit accounting.
5. Nonprofit Accounting vs. For-Profit: Different Models, Different Needs
Nonprofit organizations and for-profit companies are fundamentally different in their basic needs. Their accounting information will reflect this, as every nonprofit organization will have specific needs for their causes. Additionally, every for-profit company will illustrate their gains and losses. This difference is crucial because it illustrates the focussed accounting needs for both types of companies and organizations.
In short, these are the major differences between nonprofit accounting and for-profit accounting. All in all, there is a difference in reporting, tax status, budgeting, terminology, and needs. This illustrates the need for an understanding of the differences, so they can be reported properly.
For more information on nonprofits, check out our website.