As an accountant, if you have never handled the bookkeeping for a non-profit business, there are differences in what actions you need to take and how to view the account as opposed to accounting for a for-profit business. There are likely more differences than you think between accounting for these unique business models. Not only will the types of information and forecasting you provide be different, but the frequency of reports will also change per your client’s needs. Not to worry though, as this guide will take you through all the changes you’ll need to understand when accounting for non-profit and for-profit businesses.
Bottom Lines vs. Resource Allocation
Before we delve further into the differences between accounting for non-profit vs. for-profit businesses, let’s look at how these businesses differ in general.
- Non-Profits - Charities and organizations whose members, founders, and investors do not receive financial payment from the non-profit’s takings. While they do still aim to make a profit, these businesses use their income to pay for social outreach, education, and other charitable activities and donations.
- For-Profits - Unlike non-profits, for-profit businesses function to make a profit. This is then used to run the business in the coming year, as well as to pay owners, shareholders, and other investors, as well as any taxes.
As such, the individuals in each of these different businesses will require different things from their accountants. For-profit businesses are concerned with their expenditures and earnings so they can use them to plan for the coming month or year, but they also require accountants and documentation for tax purposes. On the other hand, non-profit businesses do not require documentation for tax purposes. But, they still need to know their overall expenditures and takings to allocate resources and ensure ongoing success.
What Stays the Same…
First off, you’ll be pleased to know that in the US both for-profit and non-profit accounting documentation will usually follow standardized structures. The content of audits, forecasts, and financial statements will appear almost the same on paper, but they will be delivered at different times and used to reach different goals and aims. This means you might need to highlight different things for for-profit vs. non-profit businesses, and tailor the advice you give to your clients depending on their needs.
What Changes…
Although you’ll be able to make the switch between accounting for these different business models, there are still some significant changes associated with for-profits and non-profits. Here are a few of the basics:
Tax Status
The most glaring difference when it comes to accounting for a non-profit over a for-profit is tax status. As long as the non-profit is a registered organization, under the IRS Revenue Code Section 501(c)(3) they are fully exempt from taxation on donations.
However, this doesn’t mean you can lose focus when it comes to a non-profit’s taxes. You’ll still have to file a tax return (form 990) for your non-profit each year, or they could lose their tax exemption. Some form of income for non-profits is taxable. Business taxes, payroll taxes, and even property taxes must be paid by non-profits depending on your state’s regulations.
Timings
Generally, for-profit accounting reports are quite stable, as everything is fine-tuned for determining the net profit and building on it. When a for-profit receives income, for example, the expenses associated with that income are immediately deducted.
For non-profits, however, donations and grants are often logged at different times to when they are received. This can make false negatives appear on reports and is something non-profit accountants should look out for.
Audits
Both for-profit businesses and non-profits require a lot of preparation from accountants for audits. However, since non-profits must abide by various accounting regulations put forth by the FASB, non-profit audits may cover more documentation and processes than for-profit reviews. Not to mention, larger donations are usually only possible if your donor is provided with audited financial documents.
As an accountant working for a non-profit, it’s best to work closely with the CFO and board to determine which internal controls need to be implemented. These include correct handling and storage of income, protecting donor data, and establishing detailed budgets. If your non-profit already have these in place, audits will be a lot smoother.
These are just a few of the differences you’ll deal with when working long-term for a non-profit organization, as opposed to a for-profit business. However, while these differences might not affect your day-to-day operations, some definitely will.
Terminology
You might come across some different terminology for the same accounting concepts, depending on whether you’re working for a non-profit or for-profit. One telling difference is that what for-profits refer to as net profit, a non-profit will call an excess of revenues over expenditures. Simple changes like this occur because of the separate aims of the organizations as discussed above. To add to this, you’ll often find your documentation is filed under different titles, even when the content stays the same.
For example, what a for-profit refers to as an income statement, a non-profit will call a statement of operations. The same goes for a balance sheet, which charitable organizations call a statement of financial position. Finally, another common change in terminology is that a statement of retained earnings is known as a statement of changes in net assets to non-profits.
Generating Income vs. Fund Accounting
While some differences in accounting for non-profit and for-profit businesses are surface level, others pose some bigger adjustments for accountants making the change.
For-profits will have a variety of income streams. However, each of these will feed into one general account. With their previous profit from this income, for-profit accounts are balanced by managing expenditure with forecast income to maximize profit. Non-profits work a little differently.
Non-profits do not need to maximize profits, so instead, they use a system known as fund accounting. This method allows non-profit organizations to direct their income into activities and resources with efficiency, by splitting it up into different funds. An account is set up for each of the different funds to carefully manage income, as well as provide precise reports to members and benefactors.
Non-Profit Organizations and Donations
Another way non-profit accounting stands out is that these organizations can receive income in the form of donations. Donations can be transfers of money, goods, services, and appreciated assets. They each require different bookkeeping practices, depending on what is being donated and how the money will be used. Let’s break it down:
Accurate Information
Just like you would for a for-profit income record when your non-profit client receives a donation, accurate information is paramount. Seek out the name of the individual or company that is donating the money, property, or other assets, as well as what the asset is, the total value, and the date of the donation. If your client’s benefactor has filed an invoice with the organization to claim tax deductions, this is the best place to find the necessary information.
Restricted Donations
Next, you should determine whether a donation is restricted or unrestricted. A restricted donation comes with requests and restrictions from the benefactor. For example, an individual may donate some money to a university under the condition that it be used to build a new library. This is a restricted donation and thus it will go into a certain fund reserved for that purpose. You can file cash donations both restricted and unrestricted as part of a non-profit’s income.
Filing Donations
Cash donations, donations in-kind (of goods, property, or services), and appreciated assets should be logged when they are pledged, rather than when the non-profit receives the value. They should be filed under donations in a non-profit’s statement of operations. Each donation, restricted or otherwise, should be itemized individually with the information listed above. While unrestricted donations may go into a general fund, restricted donations will be funneled into the right places. This will affect how certain donations will appear on your non-profit’s balance sheets and statements of changes in net assets.
In Summary…
Generally, accounting for a non-profit will be a much more ‘hands-on’ affair than accounting for a for-profit. You’ll be a valued member of the organization, and your budgets will have palpable and perceived effects on how the organization is run day-to-day. You’ll also need to keep a keen eye on income and outgoings to make sure everything is in order when your non-profit is audited.
The biggest change comes in the differing aims of these separate business models. If you can detach yourself and your documentation from the desire to maximize profits, you should have no issue as a non-profit accountant.
The differing income aims of non-profits also affect the terminology and where this money is logged and stored. Restricted and unrestricted assets must be funneled into appropriate funds, and each of these funds must be maintained as a general ledger in a for-profit would.
Finally, donations require some extra work from non-profit accountants, but the processes are standardized. This means that once you’ve got the hang of these changes, switching between non-profit and for-profit accounting will be a breeze.
Sources
https://www.irs.gov/charities-non-profits/exempt-organization-types
https://charityvillage.com/differences_between_profit_and_nonprofit_accounting/
https://www.accountingtools.com/articles/fund-accounting.html
https://www.springly.org/en-us/blog/accounting-for-donations-to-nonprofit-organizations/
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