Question

What do you see as the similarities and differences in recording transaction for governmental and for-profit companies? Give two examples of each in your discussion.

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.

For-profit companies are taxed in a number of ways, depending on their form of organization. Small businesses, for example, are usually sole proprietorships and partnerships.

Recent years have seen a melding of for-profit and nonprofit business models, as nonprofits seek to stabilize their income and for-profits seek to give something back to the community. Goodwill Industries, for example, is a nonprofit organization that accepts clothing donations, then sells the clothing in for-profit retail stores, using the income to grow the organization and fund programs and services for needy families. Chick-fil-A, as another example, is a for-profit restaurant chain that channels a large portion of its earned income into its own charitable activities.