Question

What is the difference in accounting for investments in Not-for-Profit and governmental units? Explain.

Answer 1

Sol:

Accounting for Income and Expenses

For-profit companies track revenue and expenses typically related to the sale of products and services in a general ledger, which is a single, self-balancing account that represents the business activity of a single entity. A nonprofit doesn’t sell goods and services for a profit that can be tracked within an ordinary chart of accounts in a general ledger.

Typically, a nonprofit’s revenue is made up of donations and grants. Many types of donations are restricted in their use, and grants often have a self-contained budget, which authorizes the use of funds only for the purposes and in the amounts agreed upon in the grant contract. For example, if a grant allocates $10,000 for an after-school dance program, a nonprofit can’t use that money to get new air conditioners for the main office without permission from the grantor.

As a result, a nonprofit’s accounting system is typically a series of general ledgers, or funds, which enable the organization to track revenue and expenses to a single point of origin. Theoretically, each fund has a separate budget, and this separation in the books enables the nonprofit to prove it is using grants and donations solely for permitted purposes.

Differences in Financial Reports

The financial reports between the accounting systems of for-profit versus nonprofit corporations generate also differ. A for-profit corporation keeps a balance sheet that reflects the assets the corporation owns, which can be distributed as retained earnings to shareholders. Meanwhile, a nonprofit keeps a statement of financial position, which reflects the assets on hand that can be used to further the mission of the organization. Likewise, a for-profit uses its accounting system to track net income, whereas a nonprofit tracks the excess of revenues over expenditures.

Understanding these major accounting differences between for-profits and nonprofits can help you avoid surprises and can ensure that your organization meets its financial accountability and transparency requirements under state and federal law.