Question

Respond to the following in a minimum of 175 words:

Discuss the major similarities and differences in accounting for for-profit and not-for-profit organizations. Be sure to consider differences in organizational ownership, fund accounting, and financial reporting.

Answer 1

One of the basic accounting differences between a for-profit company and a nonprofit corporation derives from ownership. Individuals and entities can own percentages or shares of a for-profit company, known as equity. An owner’s stock or percentage of ownership is recorded in the company’s accounting system and increased or decreased over time. The owners listed on the books are entitled to benefit from the company’s activities by receiving dividends or disbursements of profits, or having the value of the ownership shares or percentages increase with the company’s successful performance in the marketplace.

A nonprofit is not owned by anyone. Even though you may have founded the organization or sit on its board of directors, you don’t own any percentage of the entity. Under the laws of the state in which you set up the nonprofit, the company is run by its board, officers and staff as a public trust. This means in the organization’s accounting system, there are no owner’s equity or retained earnings accounts.

One key difference lies in the presentation of financial statements. Each type of entity uses a different set of financial statements:

For-Profit Financial Statements>

Balance Sheet

Profit/Loss Statement

Statement of Cash Flows

Statement of Owner’s Equity

Nonprofit Financial Statements>

Statement of Financial Position

Statement of Activities

Statement of Cash Flows

Change in Net Assets

Similarities between Non Profits and For Profit Business

Both non profit as well as for profit organizations have goals and missions which are well defined. Their products or services are known by every one.

The non profits should satisfy the objectives and needs of their various stakeholders just like a private company knows their customers and serve them accordingly.

Both non profit and for profit organizations have limited resources and the goals must be met with the limited funds.

Like private and commercial business corporations, many non profit organizations have boards, management and different levels of staff which help in the efficient working of the organization.