Differences Between Non-Profit and For-Profit Financial Statements
Differences Between Non-Profit and For-Profit Financial Statements
Financial statements are important to have in any transactional activities involving money. Hence, whether running a non-profit organization or a for-profit business, it’s best to prepare financial statements. Creating a financial statement works well for your accounting and accountability. It helps you keep tabs on your progress, year in and year out. The objective of this article is to compare and contrast the non-profit financial statement and statements that are for for-profit organizations.
Revenue
The revenue-related difference between a non-profit and a for-profit financial statement hinges on the “matching principle.” The matching principle applies to the financial statements of for-profit organizations. Based on this principle, for-profit organizations must report their revenue along with the associated cost in the same accounting period.
For example, granted that an organization recorded revenue for December, the cost of goods for that same month must also be inputted in the financial statement. But this is not usually the case for non-profits, where donors may make a pledge to be redeemed later. Let’s consider a scenario where a donor pledges US$ 2,500 to be remitted in four installments over two years — meaning US$ 1,250 per year.
The non-profit organization must record the whole US$ 2,500 in the year the pledge was made to it. This is despite not having received the cash — it must be reflected in your statement anyway. So, when the cash is eventually paid, it goes into the account without changing the financial statement.
Taxes
A major difference between the financial statement of non-profit and for-profit organizations is the tax report. It is generally expected that while the financial statement of a for-profit organization reflects its tax returns, the financial statement of a non-profit does not. Non-profits are primarily known to enjoy tax exemption, but this is after certain obligations have been fulfilled with the right quarters.
That said, there are instances where non-profits are expected to make known their tax returns in the financial statement. It should not go without saying that the financial statement of a non-profit organization may sometimes be complicated. The tax report of a non-profit is often considered in relation to what issues the non-profit is established to address.
For instance, a non-profit that provides disaster relief is not expected to pay tax on donations received for such (humanitarian) causes. However, the organization will be required to pay tax and report the same if other revenue-generation aspects are adopted. A good example of such aspects is doing a crafts workshop to raise funds during Giving Season.
Besides this, non-profit organizations are expected to remit payroll tax to the government, even as their employees have to pay income tax. All these taxes can be recorded in the financial statement of a non-profit organization.
Balance Sheet
In the case of a balance sheet — there is a variation in the name by which this very financial instrument (balance sheet) is known as far as the non-profit is concerned. At the same time, it is alright for for-profit organizations to term it a “balance sheet,” non-profit organizations would always prefer to call it a “statement of financial position.” That aside, another area of differentiation is asset distribution to shareholders.
As it were, non-profits can only have board members and not shareholders. Hence, the statement of financial position of non-profit organizations does not show assets distributed as retained earnings to shareholders. But the balance sheet of for-profit organizations does have such asset distribution declaration. It is, however, possible to have the assets of non-profits reinvested to actualize its charitable mission in subsequent (financial) years.
Income Statement
The income statement is another tool to distinguish a for-profit organization’s financial statement from a non-profit. It follows that for-profit organizations are known to record all that pertains to their expenses, revenue, profit, and loss in the income statement. However, this is different for non-profits — which are not established to make a profit.
Rather what you will see for non-profits is the statement of activities — which can be reported in the financial statement. This statement shows the changes in a non-profit’s net assets in association with the expenses and donations received during the year. With this instrument, non-profit organizations can focus on their missions for the future.
Financial Reporting
The financial statements of non-profit and for-profit organizations are prepared with a focus on specific attributes. While non-profits are more particular about accountability, for-profit organizations are more concerned about profitability. This status is well reflected in the issue of restricted and unrestricted funds. For-profit organizations are not restricted from spending funds for business processes how they deem fit for profit-making, but that is not the case with non-profits.
Occasions exist where grantors will determine how and when non-profit organizations should spend certain donations. In such scenarios, the financial statement must reflect undeniable accountability. To this end, the non-profit is expected to classify the donations that come into its coffers to ensure proper tracking. The appropriate tracking will prevent the organization from muddling things up with funds that are to be spent on the cause for which the business was set up in the first place.
The financial reporting system of a non-profit organization may be more complicated than a for-profit organization due to the multiple rounds of restricted funds being received. In view of the foregoing, it is right to say that non-profits are not usually free to draw a budget around their finances — but for-profit organizations can. Funds cannot just be allocated to a cause when restricted funds are involved.
In Conclusion
As a non-profit organization administrator or manager — your financial statement is critical to your sustainability and growth. This is particularly true if you are the type that frequently looks to grantors or companies to aid your cause. The statement will tell you how much accountability your organization has to follow. It is essential that you understand the different ways you will be accountable in your for-profit or non-profit organization, as stated above.
You also have an idea of some of the complexities that may revolve around preparing your non-profit financial statement in the future — and can be better guided on the differences between the financial statement of non-profit and for-profit organizations.
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