Nonprofit Accounting versus For-Profit Accounting

In conclusion, governmental and non-profit financial accounting differ significantly. Governmental accounting focuses on public accountability and budgetary compliance how is sales tax calculated using fund accounting. Non-profit accounting, however, emphasizes donor restrictions and program efficiency.

Assets and Ownership

• For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
• Unconditional pledges are recognized as revenue in the period the promise is made.
• Governmental funds typically do not record these non-current assets or long-term liabilities directly on their balance sheets.
• Finding the right balance is key to maintaining donor trust and organizational sustainability.
• One of the defining features of accounting for nonprofit organizations is the use of fund accounting.
• At Clarity, we specialize in providing clarity for nonprofits and entrepreneurs navigating the nuances of nonprofit and for-profit financial strategies.
• The main goal is to make sure that all resources go toward maximizing the organization’s impact.

However, in order to qualify for this benefit, all funds must be used for the purpose as stated in the organization’s charter. One of the most important distinctions between government and nonprofit government and nonprofit accounting organizations lies in sovereign immunity. Governments possess legal immunity from certain lawsuits and regulatory requirements that nonprofits must comply with​. This legal principle reinforces the idea that the government operates as a sovereign power rather than a voluntary public service organization.

GASB vs FASB: The Basics

The experts you hire should act as an extension of your team and work with your staff to effectively manage your nonprofit’s finances. Since your budget is your guiding financial document, you’ll want to revisit it frequently. Ideally, you should check your budget once a month so you can compare your budgeted revenue and expenses to your actual revenue and expenses. The exact design of your chart of accounts will depend on your reporting needs.

Restricted vs. Unrestricted Funds

Expenditures are generally recognized when the liability is incurred, with exceptions for items like principal and interest on general long-term debt, which are recognized when due. This distinction highlights the concept of financial accountability versus economic accountability. Governmental funds provide the financial accountability necessary for budgetary control over current expenditures. The government-wide statements provide the economic accountability needed to assess the overall financial health and long-term sustainability. The treatment of long-term assets and long-term liabilities constitutes another major divergence.

It emphasizes accountability over profitability and ensures that funds are used as intended by donors and stakeholders. Some nonprofits use a modified accrual accounting system called “fund accounting,” which tracks income and expenses in separate accounts or funds representing their different revenue sources, like grants or donations. While both nonprofit and for-profit organizations prepare financial statements, each only focuses on specific attributes.

Governmental Accounting

For many Remote Bookkeeping organizations, failing to make a single filing can result in heavy fines or loss of tax-exempt status altogether. Nonprofits are governed by GAAP rules promulgated by FASB and fund accounting distinguishes funds as unrestricted, temporarily restricted, or permanently restricted. The rest might use shorter forms, such as Form 1023-EZ or 990-PF, based on their type and size. The income statement, statement of cash flows, statement of comprehensive income, and the statement of stockholders’ equity report information for a period of time (or time interval) such as a year, quarter, or month. Under the accrual basis of accounting, revenues are recorded at the time of delivering the service or the merchandise, even if cash is not received at the time of delivery.

• Your nonprofit accounting practices should include regularly monitoring restricted fund usage, tracking pledge payment schedules, managing matching gift requirements, and documenting compliance with donor terms.
• Nonprofits often rely on grants and donations, in addition to fees-for-service income.
• For-profits recognize sales as revenue when products are shipped or services are completed.
• For-profit organizations have it simple; they just track net income from sales.
• Some donations, and many grants, will come with limitations on how and when your nonprofit can use them.

Reports must demonstrate how expenditures align with outcomes, highlighting the importance of every dollar spent. For example, a manufacturing plant may invest less in new equipment to remain competitive. Forecasting—predicting future revenue and expenses—ensures that the operation is always poised for innovation. These differences reflect the nonprofit’s need to demonstrate how resources are allocated toward mission-related activities. For-profit entities primarily earn revenue through the sale of goods or services, recognizing income when it is earned and realizable.

Reporting Requirements and How These Funds Appear in Financial Statements

By the end of this guide, you’ll have the skills to confidently manage your nonprofit’s accounting needs. For nonprofits operating globally, International Financial Reporting Standards (IFRS) may apply. IFRS for Small and Medium-Sized Entities is a framework relevant for nonprofits.