Are your new employees and board members up to speed on the key accounting differences between nonprofits and for-profits? While these two entities share certain similarities—such as the need for accurate financial reporting—there are fundamental distinctions that can confuse those transitioning from a corporate to a nonprofit environment. Understanding these differences is crucial for ensuring compliance and clarity in financial management.
The primary difference between for-profits and nonprofits lies in their objectives. For-profit businesses focus on maximizing profits for their owners or shareholders, with financial growth being a key indicator of success. Nonprofits, however, are mission-driven, striving to generate enough revenue to support their mission today and sustain it into the future.
These differing goals are reflected in their financial reporting. For-profit financial statements emphasize profitability and asset growth to indicate future dividends and returns for shareholders. In contrast, nonprofit financial statements focus on demonstrating financial health, stability, and the responsible use of funds to various stakeholders, such as funders, board members, the community, and tax authorities.
One of the most noticeable differences is the terminology used in financial reporting. For-profit businesses produce a balance sheet, which details the company's assets, liabilities, and equity—representing the ownership interest of shareholders.
Nonprofits, having no owners, instead prepare a statement of financial position. While similar in tracking assets and liabilities, the resulting net assets are categorized into two classes: with donor restrictions and without donor restrictions. Nonprofit financial statements also place a higher emphasis on transparency, often including detailed footnotes about donor-imposed restrictions or internal board limitations on net assets.
For-profits generate an income statement, also known as a profit and loss (P&L) statement, to evaluate financial performance. This document lists revenue, expenses, gains, and losses to show how much profit the company has earned over a period.
Nonprofits, however, use a statement of activities, which similarly details revenues and expenses, but also distinguishes how those revenues impact net assets (restricted or unrestricted). Nonprofits may receive revenue from a mix of donations, grants, and fees for services, requiring this nuanced approach.
Additionally, nonprofits prepare a statement of functional expenses, where expenditures are broken down by their natural classification and function—such as program services, management, and fundraising. This statement not only helps in filing the annual IRS Form 990 but also enhances transparency for donors and other stakeholders by showing how resources are allocated.
There are additional nonprofit accounting concepts worth noting, especially for those in leadership or governance roles. For example, nonprofits must manage and report on restricted funds, ensuring that contributions earmarked for specific purposes are used accordingly. They may also deal with complex tax-exemption regulations that differ from standard business taxes.
If your organization’s team members or board come from corporate backgrounds, providing training on nonprofit accounting practices is vital. These differences in financial reporting can be complex, but educating your staff will promote better financial stewardship and compliance.
Need help guiding your team through these nuances? Reach out to us for support in educating your stakeholders and ensuring your nonprofit’s financial health is in good hands.
The HoganTaylor Nonprofit team of business advisors and CPAs is comprised of former CFOs, controllers, and industry experts with extensive experience providing the guidance organizations need to lean forward again in their leadership. If you have any questions about this content, or if you would like more information about HoganTaylor’s Nonprofit practice, please contact Jack Murray, CPA, Nonprofit Practice Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.