Are you considering starting a nonprofit, or want a better understanding of how nonprofit finances work? This overview explains the key differences between nonprofit and for-profit accounting standards. It’s not just donations and tax exemptions that distinguish nonprofit and for-profit finances. Each has fundamentally different goals, which are reflected in the way each one tracks and reports its finances. Keep reading for a clear breakdown of the main accounting differences between nonprofits and for-profits.

Nonprofit vs. For-profit: Mission and Structure

Nonprofit organizations are different from for-profit businesses because of their commitment to public, environmental, or social good. Typical examples of nonprofits are charities, hospitals, and churches. These organizations operate without the primary objective of profit generation. Due to their focus on providing public benefits, nonprofits can apply for and be exempt from federal income taxes. Nonprofits utilize the help of both employees and unpaid volunteers. Contrary to popular belief, nonprofits generate significant revenue through various channels such as donations, grants, and service sales. That revenue is prioritized toward the nonprofit’s mission, vision, and goals.

For-profit organizations, in contrast, prioritize profit generation for their owners or shareholders. These businesses are subject to corporate income taxes and other fees. The main goals are growing the business and increasing profits. All employees of a for-profit business are paid for their work.

Nonprofit vs. For-profit: Governance and Scrutiny

Both for-profits and nonprofits require strong financial management, but the latter deals with stricter scrutiny due to their tax-exempt status. Once a nonprofit attains tax-free status, it must adhere to special rules and regulations to maintain that coveted classification. The organization must also consistently demonstrate ethical use of funds and a high level of transparency. Strong governance, which includes a nonprofit’s board of directors, helps make that happen. These conscientious stakeholders are in charge of overseeing mission fulfillment and help ensure the organization operates in the best interest of the public.

For-profit businesses, however, typically have simpler structures focused on maximizing shareholder value. While a for-profit business may also have a board of directors, the owner or CEO are the primary decision-makers. This makes for a simpler governance structure since there is clear ownership or shareholder control.

Nonprofit vs. For-profit: Accounting Standards 

Nonprofit accounting standards differ significantly from those of for-profits, especially in terms of financial reporting, revenue recognition, taxation, and accounting for net assets. Let’s look at the key differences of each.

• Financial Reporting: Nonprofits produce a “statement of activities,” which shows revenue and expenses for each program, ensuring funds go towards their stated cause. For-profits produce an “income statement,” which shows overall revenue and expenses by product or service.

• Revenue Recognition: Nonprofits recognize contributions and grants as revenue when received or pledged, while for-profits recognize revenue when goods or services are delivered.

• Taxation: Nonprofits are generally exempt from federal and state income taxes. For-profits are subject to income taxes and other business-related taxes.

• Accounting for Net Assets: Nonprofits divide their financial resources (net assets) into three categories: unrestricted, temporarily restricted, and permanently restricted.

• Unrestricted net assets are donations with no strings attached and can be used for general expenses or any other legitimate purpose of the nonprofit.

• Temporarily restricted net assets are usually designated by the donor for a specific program or project and must be used within a set timeframe.

• Permanently restricted net assets are usually endowments to be invested in perpetuity, with the interest and proceeds utilized for a specified purpose.

All three categories of net assets help nonprofits better demonstrate their responsible use of donated funds. Conversely, for-profit businesses have just one category for net assets. They don’t have restrictions placed on those funds, which allows more freedom in how they use their income.

The Takeaway

The accounting standards for nonprofits and for-profits are worlds apart. Considering the complexities of nonprofit accounting, guidance from a professional accounting services team can help ensure your nonprofit thrives. Our friendly accountants at Qbix assist hundreds of nonprofits like yours, helping each maintain its public charity status, navigate complex accounting scenarios, and gain more funding. Don’t wait — give yourself peace of mind and schedule a free call with a Qbix nonprofit accountant today.

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