While you might understand the distinctions between nonprofit and for-profit accounting systems, do your new employees and board members? Both types of organizations have certain similarities, such as the need for careful transaction tracking and the production of accurate, timely financial statements. However, the differences are significant enough that providing training 
for new board members and staff with corporate backgrounds can be beneficial.
Profit vs. Charitable Mission
For-profit organizations are primarily focused on maximizing profits for their owners. In contrast, nonprofits aim to generate revenue to support their mission both now and in the future.
This fundamental difference is reflected in their financial statements. For-profit entities primarily report on profitability and asset growth, which relate to future dividends and returns for owners and shareholders. Conversely, nonprofits emphasize their financial position, stability, and expenditures to inform funders, board members, the community, and tax authorities.
Balance Sheet vs. Statement of Financial Position
The financial statements used to report assets and liabilities differ between the two types of organizations. For-profit companies create a balance sheet that includes owners’ or shareholders’ equity, based on assets, liabilities, and past profits.
Nonprofits, lacking owners, prepare a statement of financial position, which similarly assesses assets, liabilities, and prior earnings. The resulting net assets are categorized into those with donor restrictions and those without. Nonprofits typically prioritize transparency more than for-profit companies, leading to financial statements that include disclosures regarding the nature and extent of donor-imposed restrictions and internal limits established by the board.
Income Statement vs. Statement of Activities
The reporting methods for revenues and expenses also vary between for-profits and nonprofits. For-profits produce an income statement (or profit and loss statement) that lists revenues, gains, expenses, and losses to assess financial performance.
Nonprofits, which often depend on grants, donations, and fees-for-service income, prepare a statement of activities. This document outlines total revenues minus expenses, categorizing the impact on each net asset class.
Additionally, nonprofits may create a statement of functional expenses, detailing their expenditures (such as salaries and benefits, rent and utilities, and office supplies) by functional categories: program, administration (or management), and fundraising. This statement aids nonprofits in preparing their annual Forms 990 and enhances transparency for donors and supporters.
Additional Differences
There are other financial reporting and accounting concepts specific to nonprofits that may be important for staff and board members to grasp, depending on their roles. If you have questions or need assistance in educating your stakeholders, feel free to reach out to us.
