Accounting Basics: For-Profit vs. Not-For-Profit

By: William Bauder, CPA, CGMA, CITP, Manager of Assurance and Advisory Services 

There are many consistencies between accounting in a for-profit organization and accounting in a not-for-profit organization; however, there are some nuances as well. Let’s take a look at a few of them.

First, let’s tackle the terminology.  In the for-profit world, accountants are looking at a complete set of financial statements including a balance sheet and a P&L, or income statement, and the statement of cash flows.  In a not-for-profit’s complete set of financial statements these items are still present, however the balance sheet is now called the statement of net assets, the P&L is called the statement of changes in net assets, and the cash flow remains the same.

In the nonprofit world, we aren’t dealing with equity or retained earnings, instead there are net assets.  These are currently segregated between three possible classifications: unrestricted, temporarily restricted, or permanently restricted.   Nonprofits are also required to disclose their expenses across functional category; those being management and general, program, or fundraising.  Often times an expense can be allocated to multiple functional categories, therefore, it is quite common for management to allocate these expenses based upon some allocation method, for example payroll hours, or square footage.

While most people think that all operations of a not-for-profit are tax free, that is not necessarily the case.  Something known as unrelated business income tax could cause a non-profit to actually pay taxes.  For example, say your organization is an Association for a business trade, and you own your own building.  Say, your Association has more space than it needs, so, it rents out a portion of the building to a small business, say a coffee shop.  The Association is now earning revenues for renting space, which is not align with the exempt purpose of the information, therefore, those revenues (allowable to be offset by certain expenses) are subject to federal income tax.

This gives just a glimpse into the ways the for-profit and not-for-profit worlds differ in the ways of handling finances. For more information on the ways Holbrook & Manter can help your nonprofit achieve your mission, contact us today.