Accounting for Nonprofit Organizations
A nonprofit organization is fundamentally different than a for-profit organization. A social mission is at the center of a nonprofit and the organization exists to provide a particular service or services to the community and there is no “bottom line”. A for-profit organization exists primarily to generate a profit for the shareholders/owners.
There are numerous differences between nonprofit and for-profit entities in addition to the fundamental differences stated above. The main differences between the entities are 1) the presentation and reporting of items in the financial statements, 2) United States tax status, 3) the mission of organization, 4) the types of revenues and sources of funds to sustain the organization, 5) the annual reporting to the government [1] and 6) who the owners are.
Several of the financial statements are reported differently for nonprofits than for for-profits. The Balance Sheet and Income Statement of a for-profit is the Statement of Financial Position and Statement of Activities for a nonprofit, respectively. A nonprofit may have a Statement of Functional Expenses and there is no equivalent report for a for-profit. A for-profit will have a Statement of Stockholders’ Equity whereas a nonprofit does not. A for-profit’s Stockholders’ Equity (total assets minus total liabilities) is reported as Net Assets for nonprofits. The “equivalent” portion of the Stockholders’ Equity for paid-in-capital and retained earnings, on a for-profit’s Balance Sheet, is broken down in several categories for a nonprofit and include 1) unrestricted, 2) temporarily restricted and 3) permanently restricted net assets (based on donors stipulations).
The US tax status of for-profit and nonprofit organizations is a primary difference between the two types of entities. Nonprofits are exempt from paying income taxes (if approved by the IRS) whereas for-profits must pay income taxes on their annual net income. When you consider that most for-profit
There are numerous differences between nonprofit and for-profit entities in addition to the fundamental differences stated above. The main differences between the entities are 1) the presentation and reporting of items in the financial statements, 2) United States tax status, 3) the mission of organization, 4) the types of revenues and sources of funds to sustain the organization, 5) the annual reporting to the government [1] and 6) who the owners are.
Several of the financial statements are reported differently for nonprofits than for for-profits. The Balance Sheet and Income Statement of a for-profit is the Statement of Financial Position and Statement of Activities for a nonprofit, respectively. A nonprofit may have a Statement of Functional Expenses and there is no equivalent report for a for-profit. A for-profit will have a Statement of Stockholders’ Equity whereas a nonprofit does not. A for-profit’s Stockholders’ Equity (total assets minus total liabilities) is reported as Net Assets for nonprofits. The “equivalent” portion of the Stockholders’ Equity for paid-in-capital and retained earnings, on a for-profit’s Balance Sheet, is broken down in several categories for a nonprofit and include 1) unrestricted, 2) temporarily restricted and 3) permanently restricted net assets (based on donors stipulations).
The US tax status of for-profit and nonprofit organizations is a primary difference between the two types of entities. Nonprofits are exempt from paying income taxes (if approved by the IRS) whereas for-profits must pay income taxes on their annual net income. When you consider that most for-profit
References: [1] http://www.accountingcoach.com/nonprofit-accounting/ [2] http://www.artcpas.com/Press/FASB%20Issues%20New%20Guidance%20on%20Nonprofit %20Mergers.htm [3] http://www.fasb.org/cs/ContentServer?c=Pronouncement_C&pagename=FASB%2FPronoun cementC%2FSummaryPage&cid=1176155763834 [4] http://www.grantthornton.com/staticfiles/GTCom/Audit/Assurancepublications/New%20 Development%20Summaries/NDS%202010/NDS%202010-14.pdf [5] http://www.irs.gov/charities/article/0,,id=136195,00.html [6] http://www.nonprofitaccountingbasics.org/audits-external-reporting-disclosure/key-disclosures/common-disclosures [7] http://portal.asherco.com/node/119