Nonprofit bookkeeping looks quite a bit different than for-profit bookkeeping, which is why it’s important to have a nonprofit accounting specialist who fully understands the unique differences. A charitable organization with nonprofit status should also have tax-exempt status, but tax-exempt organizations must still keep accurate records to track the nonprofit’s finances and financial stability. While there are major accounting differences, the Financial Accounting Standards Board outlines some generally accepted accounting principles (GAAP) and serves as a reliable resource for both nonprofit organizations and for-profit businesses.
Differences in Terminology and Concepts
Nonprofit organizations, also called not-for-profit organizations, are essentially businesses with a unique set of financial requirements and specific accounting terminology. In many cases, a nonprofit has donors instead of customers and volunteer hours instead of vendors. Also, instead of focusing on sales like for-profit accounting, a nonprofit’s financial records demonstrate how it fulfills its charitable purpose through the appropriate use of the nonprofit’s revenue and assets. A for-profit company’s stakeholders are only concerned with the bottom line, while nonprofit stakeholders are concerned with the allocation and utilization of resources based on the organization’s overall mission.
Therefore, nonprofit accounting differences frequently stem from nonprofits being more focused on tracking the contributions made to their organization and how these contributions were spent. Many financial statements prepared for for-profits don’t provide meaningful information for nonprofits. Some of the differences in concepts and terminology are subtle but still important.
For example, nonprofit bookkeeping includes calculating the changes in assets available for future services, which is captured in the statement of activities. Revenues increase the assets available for future services, and expenses decrease these assets. A for-profit business uses an income statement, also known as a profit and loss statement, to demonstrate revenue and expenses.
Another key difference is that a nonprofit uses a statement of financial position to calculate its total assets on hand and the availability of those assets for future services, or its net assets. Alternately, a for-profit business uses a balance sheet to show the availability of assets for distribution to its shareholders as retained earnings.
Therefore, a for-profit entity has a statement of retained earnings, while a nonprofit has a statement of changes in net assets to demonstrate how unrestricted and restricted net assets changed from one period to the next. Also, for-profit companies have a net income, while nonprofits have an excess of revenues over expenditures. However, the statement of cash flows and the concept of revenue and expenditures are basically the same for a nonprofit organization and a for-profit company.
Nonprofits Use Fund Accounting
Key differences in nonprofit accounting and for-profit accounting also stem from the concept of fund accounting, which focuses on accountability instead of profitability. Typically, a for-profit entity uses a general ledger to create a single self-balancing account. Nonprofits usually have several general ledgers to track multiple funds. The fund accounting framework allows nonprofit organizations to separate their resources into different accounts, which lets them identify the individual sources of funds and their intended use.
Therefore, nonprofit accounting records represent a collection of funds. Each fund has a unique purpose and must be individually balanced. However, this only provides an accounting segregation, not necessarily a physical segregation of resources. The financial reports provide details on expenditures and revenues for each fund and summarize financial activities across all funds.
Financial reports used in for-profit accounting may also retain individual revenue and expense accounts but usually blend balance sheet accounts. Also, business financial statements focus on meeting lending covenants, returns on investments and net income.
Direct Contributions and Restricted Funds
Another significant difference between profit and nonprofit accounting deals with revenue. Not-for-profit organizations can earn revenue from selling goods, providing services, etc., just like for-profit companies. However, nonprofits also receive revenue from direct contributions, such as monetary and in-kind donations and grant funding. They have two accounting methods they can use to recognize the revenue received from these sources:
- The deferral method acknowledges revenue as soon as expenses directly related to these funds are incurred.
- The restricted fund method separates revenue based on what type of restriction a donor placed on the funds they contributed to the organization. The two possible restriction levels include:
- Unrestricted funds or assets have no restrictions placed on the revenue and can be used for general use.
- Restricted funds or assets have restrictions placed on the revenue based on a set period of time or performance of defined activities. These funds are generally earmarked for a specific program or project, but once the set time period elapses or the event passes, the donations can be used for general purposes. Some restricted assets or funds are strictly designated for a set purpose or time period that never expires. These funds are retained and used only for specified purposes, such as ongoing programs or annual events.
Trust the Nonprofit Bookkeeping Experts
When you need reliable bookkeeping services for your new or established nonprofit or not-for-profit entity, trust the experts at Navitance. We specialize in helping any nonprofit organization with its financial recordkeeping needs. Our accounting professionals help nonprofits of every size. Through our flexibility and scalability, your nonprofit can tailor its services to have us handle either only certain bookkeeping tasks or your entire nonprofit accounting needs. As your outsourced bookkeeping services provider, we can help with preparing financial statements and other reports for your board members, including the Statement of Financial Position, Statement of Activities and Cash Flow Statement.
Navitance can also help for-profit organizations with their accounting needs. We specialize in helping start-ups set up their books and maintain recordkeeping requirements. We’re experts at compiling an accurate accounting system for nonprofit and for-profit companies alike. Contact us at 978-809-3282 to learn more about our nonprofit bookkeeping services, or request a consultation online and take the steps to ensure your nonprofit’s continued financial health.