Accounting is just money management, right? It’s monitoring transactions and summarizing the status of revenue and expenses at a point in time. This is true on a basic level, but corporate, small business, and nonprofit accountants must also project, forecast, and make recommendations related to these financial transactions. Numbers 4 Nonprofits recognizes a few key differences when providing accounting services to nonprofit vs. for-profit organizations. These differences drive our firm’s mission of Managing Money with Mission to promote the goals and vision of the nonprofits we serve.
Differences in Accounting Practices for Nonprofits vs. For-profits
Being able to make sound decisions with the assets of an entity is a goal that both nonprofit and for-profit accountants share. Simple enough! The differences lie in the use of those assets: for-profit entities are focused on growing their revenue based on the sale of goods and services, whereas nonprofits allocate funding to support their mission-based programming and sustain their organization.
A nonprofit’s financial statements have a different naming convention than for-profit entities and stakeholders are focusing on different line items. A for-profit’s Balance Sheet emphasizes assets, liabilities, and retained earnings. A nonprofit’s Statement of Financial Position also shows assets and liabilities but emphasizes net assets. Similarly, a for-profit’s Income Statement looks at net income or loss while a nonprofit’s Statement of Financial Activities highlights the change in net assets.
Retained earnings are only relevant with for-profit entities. Nonprofits do not have owners and no one person will have a higher percentage of ownership over another.
Nonprofit Financial Activities
For-profit entities offer a service or product in exchange for payment. Earned revenue is dependent on the tangible benefit. Nonprofits track resources separately based on restricted and unrestricted funds. For example, when a nonprofit receives contributions at a charitable event they are hosting, the accountant will use different ledgers to track raffle sales (unrestricted) than a donation to a certain program (restricted). Rather than lumping all contributions into one bucket, a nonprofit is now able to provide specific reporting on certain funds to their board of directors, donors, and funding sources.
Beyond restricted and unrestricted contributions, nonprofits need to properly record their in-kind contributions and corresponding in-kind expenses. If a sign-making company donates time and materials for sponsorship signage at a nonprofit’s golf event, all in-kind contributions need to be recorded as revenue at fair market value along with the related expense incurred. Some in-kind donations can even affect a nonprofit’s net assets.
Our commitment to your mission is what separates our accounting firm from others. We understand how nonprofits function and need to reflect their viability to boards and to the community. Let us show you how we stand out!
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