Question

What principal differences from governmental and not-for-profit organizations from business organizations.

What is the biggest difference between government and not-for-profit organizations from business organizations when it comes to accounting practice? I thought the rules were the same for both but what really makes them different? They are both held accountable to the FAF or GASB and FASB. So my real question is what really makes them different?

Answer 1

There are a lot of similarities between government and not-for-profit organizations from business organizations in terms of accounting practices but still there are some differences. The main differences are as follows:-

1. Accounting Standards – Both government and not-for-profit organizations must follow GAAP (the Generally Accepted Accounting Principles). But in addition to GAAP, government and nonprofit organizations have additional standards they need to follow that differ from each other:

Government - GASB (Government Accounting Standards Board) - the GASB is intended for taxpayers, public officials, investors, and others who use financial reports, specifically for state and local government agencies within the United States. The GASB defines three different reporting methods for government accounting.

Non-profits organisations – FASB (Financial Accounting Standards Board) - The FASB is intended for investors and others who use financial reports, essentially any public, private, or nonprofit organization or business. Unlike the GASB, the FASB defines only one method of reporting for nonprofit accounting.

2. Statements - There are three main financial statements that government and not-for-profit organizations follow in their reporting. Two of them are the same: Statement of Activities and Statement of Cash Flows. The third statement, while technically a statement of the same information, is referred to differently by both entities:

Government – Statement of Net Position

Non-profits organisations – Statement of Financial Position

These statements are similar to balance sheets. They summarize the assets and liabilities. The statements are similar to each other because in both the non-profit organisations and the government, there is no owner. The main difference is that the statements represent the assets that affect different people: for the government’s statements, it affects the taxpayers; for the nonprofit’s statements, it affects those who benefit from the nonprofit.

3. Reporting – The method of reporting of government and not-for-profit organizations from business organizations are different from each other. The method of reporting is explained below:-

Government Accounting - Every year, government organizations must put together a CAFR (Comprehensive Annual Financial Report). The CAFR analyzes the financial status of the entity, and is put together using the GAAP and GASB.

The CAFR can include overall financial data as well as information on specific funds and reports the results of the financial year. The CAFR also includes consolidated financial statements and includes accumulations from previous years. This also includes a comparison of the period budget and the actual spend.

Non-profit organisations Accounting – Non-profit organizations are not required to publish CAFRs. However, they are required to put together financial reports for their Board of Directors and subsequent investors. These are called the Report of Consolidated Financial Statements which will include Statement of Activities,

Statement of Financial Position, and Statement of Cash Flow.

Nonprofits typically do this through their fund accounting software, as most solutions include templates that make reporting easier to read.