Those who launch a non-profit want to change the world. Whether you’ve run a non-profit in the past or not, it is important to know that they have a different financial framework than for-profit businesses. As a result, they have a wide range of accounting differences. Failure to maintain your books according to non-profit laws can jeopardise the non-profit’s tax-exempt status, leading to legal liability for those involved. Today we are going to discuss the accounting differences between for-profit and non-profit businesses.
One of the biggest differences between for-profit and non-profit is how you derive ownership. In for-profit businesses, individuals and entities can own shares or percentages in the company. This is known as equity. You record these stock, shares or percentage ownerships in the accounting system and can increase or decrease over time. The list of individuals on the books are entitled to benefit from the company’s activities via dividends or disbursements of profits. Alternatively, the value of the ownership or shares or percentages increase with the company’s successful performance in the marketplace.
A non-profit, however, is not owned by anyone. Though you may have founded the organisation or sit on its board of directors, you don’t own any percentage of the entity. A non-profit is run by its board, officers, and staff as a public trust, meaning there is not retained earnings accounts or owner’s equity.
Income and Expenses
An important part of for-profit businesses is tracking revenue and expenses related to sales and services. This account represents the business activity of a single entity and helps you grow your business.
A non-profit, however, doesn’t sell goods and services for profit, and this cannot be tracked with ordinary accounts ledger. A non-profit’s revenue is typically made up of donations and grants which are restricted in their use. Grants also have a self-contained budget, authorising the use of funds only for the purposes and mounts agreed on in the grant contract. If a grant contract specifies money is to be used to provide sleeping bags for the homeless, it cannot be used to buy new AC for the non-profit’s office without permission.
As such, a non-profit’s accounts are typically comprised of general ledgers or funds, allowing the organisation to track revenue and expenses to a single point of origin. Theoretically, each fund should have a separate budget that allows a non-profit to prove it is using donations and grants only for permitted purposes.
Grants can fall under one of these three categories:
These assets are those given by a donor who stipulates that the assets can never be used up. For example, a donor may give a non-profit $10,000 with the stipulation that it cannot be used up. In this case, a non-profit can place the money in a savings account and use the interest the account earns, without touching the money.
Funds with temporary restrictions means they are meant for a specific purpose, for example, building maintenance. In this case, even the interest on the money would be temporarily restricted until used.
These funds have no spending restrictions. As a result, the organisation can utilise them at their discretion to support the organisation.
There is a great deal of difference between the accounting systems for non-profits and for-profits. While a for-profit keeps a balance sheet that reflects the assets a corporation owns, a non-profit keeps a statement of financial position. A for-profit business distributes retained earnings to shareholders. However, a non-profit reflects the assets on hand that you can utilise to further the mission of the organisation. A for-profit uses an accounting system to track net income, to grow the business. On the other hand, a non-profit tracks the excess of revenue over expenditure. It is important to understand the differences between for-profits and non-profits to ensure you avoid any surprises and ensure your organisation is financially accountable, as well as transparent.
The Importance of Donation Tracking
Whether you are non-profit or for-profit, it is important that you have an accountant and an accounting system to record and summarise a wide variety of financial purposes. This is important for:
- Financial planning
- Strategic planning
- Cash flow management
- Financial reporting
Non-profits, however, have the added responsibility of tracking the source of funds and fully disclosing any donations received and distributed. This is an extra layer of accounting as funding is typically for a specific purpose. As a result, you need to be able to show that funds have been allocated properly. You need to have the proper accounting measures in place, and an accountant – like Siragusa – with non-profit experience to ensure you are following all state and federal laws.
Non-profit and for-profit organisations both require recording, supporting documents and financial statements for internal and external purposes. But the differences that exist are extremely important. This is why we recommend you use an accountant to ensure you are following all required procedures.
Do you run a non-profit organisation? Are you starting one? Do you need a qualified accountant who can help you navigate the intricacies of non-profit accounting? Contact the team at Siragusa today for helpful advice from our team!