Accounting, as designed, differs for both non-profit and for-profit organizations alike. The principles of accuracy and compliance apply to both. Nonprofit bookkeeping, however, utilizes unique missions, funding sources, and requires reporting standards that differ from those of its for-profit counterparts. As a non-profit leader, stakeholder, or financial professional seeking clarity, understanding the differences between for-profit and non-profit accounting is crucial.
The following guide discusses the differences between nonprofit bookkeeping and for-profit bookkeeping. You must know what sets them both apart, especially when it comes to regularly preparing for audits year-round. Let’s begin with what you need to know.
What Is The Core Difference Between For-Profit and Nonprofit Accounting?
There is a significant distinction between for-profit and nonprofit. Specifically, it’s their respective purpose. Let’s discuss what they are:
- For-profits: They earn profits for owners and shareholders alike. The explicit goal for these organizations is to generate revenue. The profits can also be used for purposes such as investing in expansion, product development, and other activities that help achieve higher business goals.
- Nonprofits: Created to serve a mission. The revenue they generate further propels their cause. It can be applied to public health, faith, education, or any other mission of the cause itself.
Nonprofits typically do not have owners, meaning no one has full authority or control solely over the organization and its activities. They have decision-makers, such as a Board of Directors, who determine where the money they raise from donations is allocated. This includes reinvesting in services and programs aligned with the mission. Plus, the organization will report and categorize net assets that differ from those of for-profit businesses.
Net Assets vs Equity And Why It Matters
The balance sheets for-profit use are for reporting equity. Thus, they indicate the ownership stake of major shareholders. Nonprofits report net assets. These are divided into the following:
- With donor restrictions: These funds are specifically earmarked for programs, projects, or timelines that align with your organization’s objectives.
- Without donor restrictions: Funds accessed at the discretion of the nonprofit.
Knowing this segmentation in nonprofit financial management is key. Because transparency and accountability are necessary for how the funds are used. It is essential to prevent the misuse of donations and ensure that the nonprofit implements adequate safeguards.
Fund Accounting For Nonprofits
Fund accounting is a cornerstone for nonprofit bookkeeping. This applies to tracking resources, be it purposeful or through donor intentions. Some funds have their revenues, expenses, and balances. This includes the following examples:
- An unrestricted and flexible general operating fund.
- A building fund donation that restricts access until the construction starts.
- Tracking funds for a youth program operated by your organization.
The key point to remember is that managing these funds still requires precision and accuracy. This includes coding, segregation, and tracking that is done carefully. Conducting these tasks can present challenges, leading you to consider hiring an expert familiar with nonprofit accounting who can accurately handle the work on your behalf.
Non-Profit Revenue Sources Are Complicated
Customers who purchase products or services generate revenue for the for-profit organizations. Nonprofits generate revenue through a variety of complex approaches. These include:
- Grants (from private organizations, corporations, government programs, etc.)
- Donations (individual donors, religious groups, foundations, corporations, etc.)
- Program service fees
- Membership dues
- Fundraising
Each income stream has a set of rules regarding use and regular reporting. Thus, the more you have, the more you can potentially raise for the organization. Which also means more obligations for reporting. Grants could feature requirements regarding compliance and deadlines. Nevertheless, accurately track your restricted revenue. You will need to fulfill the reporting obligations along with the donor intent (if present). All of these differ from standard sales reporting that for-profit companies perform regularly.
Compliance and Reporting Is Key
Another significant difference between for-profit vs nonprofit accounting is compliance and transparency. Both of which are particularly critical for nonprofits. That’s because it will require using paperwork such as:
- IRS Form 990: Nonprofits use this form during tax filings. The purpose is to provide financial and operational details. This will all be public knowledge. The form will include compensation, program outcomes, its governance structure, and other pertinent information.
- Grant reporting: Grantors require detailed expenditure tracking, along with program impact data.
- Audit requirements: This will depend on factors like revenue and grant levels. Your organization is subject to independent financial audits if it meets certain monetary thresholds. Therefore, consider reviewing any laws or regulations regarding revenue amounts that may trigger an audit, thereby avoiding penalties or additional scrutiny.
- State Charitable Registration: Depending on the state, your organization is required to file an annual report to maintain its nonprofit status. Each state will differ from one another in terms of these requirements.
Failure to comply leads to numerous consequences. They include penalties or loss of tax-exempt status. That is why making accurate financial statements is a requirement as well as the smartest move you can make.
Mission-Driven Performance Metrics
Metrics like profitability, ROI, and shareholder value matter to for-profit businesses. Nonprofits rely on the mission impact to measure performance. Financial statements need to tell a story about how well the organization performs, whether on a monthly or annual basis. This includes:
- Resources used
- Delivers programs and services
- Spends donor funds
For these reasons, nonprofit leaders require a bookkeeping system that provides insights into the delivery of their mission and the financial health of their organization. A nonprofit financial management support system helps make sure they are accurate, timely, and actionable. Compare that to DIY nonprofit bookkeeping, and you deal with fewer headaches during audit time.
Without a solid system in place for fund accounting, donor restrictions, and compliance tracking, significant risks exist. These include:
- Failure to track grant spending accurately
- Misreporting restricted funds
- Missed financial report deadlines
- Relying on incomplete or inaccurate data used for making strategic decisions.
Avert these risks by hiring a bookkeeper who specializes in nonprofits. They create a plan to handle nonprofit financials, including daily bookkeeping and preparing for audits.
Trust The Quantify Group For Your Nonprofit Bookkeeping Needs
Nonprofit bookkeeping is more complex than that of for-profit businesses. Which means doing it DIY style will be difficult. That’s why The Quantify Group has bookkeepers who familiarize themselves with the way nonprofits operate and how they report their monetary earnings and in-kind donations. Why risk everything by doing bookkeeping DIY and with a shaky system when you can get a professional to do it for you? For more information on how we can assist you, please contact The Quantify Group now.
