Non-profit organizations offer some of the most essential services to the most vulnerable members of our society. They cover a diverse range of functions, from providing social service support to disadvantaged people, to helping their clients find and cope with healthcare costs. They also include public and religious charities. The accounting for these types of organizations is extremely important because their budgets are always a delicate balance. Let’s take a look at how non-profit accounting is different from accounting done in for-profit contexts.
Non-profits need internal control and review
Non-profit organizations sometimes run on an extremely tight budget. In order to keep them running year after year, accountants and board members need to effectively control their business expenses. This means that they may need advice to introduce cost-saving measures to keep expenses in line. They also need to be able to conduct regular financial reviews and be able to adapt very quickly to changing circumstances. This is the first way non-profit accounting is different.
Non-profits are exempt from paying taxes
Another way non-profit accounting contrasts for-profit business is that its accountants need ensure that non-profit groups are in line with government regulations and that they reap the benefits of their special status when tax time rolls around. A lot of non-profits are entitled to tax exemptions because they aim to better society. The earnings are not considered income, as they would with a for-profit, but rather money brought in to a non-profit is considered to be a donation.
Non-profit accounting also segregates the accounts a lot more than for-profit companies. They keep their money for different resources and aspects of the business more spread out across several accounts. This enables them to quickly see at a glance what exactly is spent in each area of the organization. It makes reconciling at the end of the year quick and easy, and promotes transparency with funds.
They report differently than for-profits
A for-profit business will have to create a balance sheet that has tracked income, expenses, and losses in each quarter. Sometimes they will have to present this to a board or to shareholders for review. Non-profit accounting, on the other hand, has to prepare a statement that details their activities and expenses to show where the funding was being spent over that quarter and provide a summary of the organization’s financial situation going into the next quarter.
Non-profit organizations and for-profit companies do not approach their accounting practices in the same way. The main reason is that they have dramatically different goals. The goal of the for-profit is to make as much money as possible. While the goal of a non-profit is usually the public good; they are not concerned with making anyone in the organization wealthy and increasing profits. This is why they are tax exempt; they report their earnings differently, and they segregate their accounts. These are the major aspects that differentiate non-profit accounting from a for-profit organization.