Accounting for Nonprofit Organizations

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A nonprofit organization is fundamentally different than a for-profit organization. A social mission is at the center of a nonprofit and the organization exists to provide a particular service or services to the community and there is no “bottom line”. A for-profit organization exists primarily to generate a profit for the shareholders/owners. There are numerous differences between nonprofit and for-profit entities in addition to the fundamental differences stated above. The main differences between the entities are 1) the presentation and reporting of items in the financial statements, 2) United States tax status, 3) the mission of organization, 4) the types of revenues and sources of funds to sustain the organization, 5) the annual reporting to the government [1] and 6) who the owners are. Several of the financial statements are reported differently for nonprofits than for for-profits. The Balance Sheet and Income Statement of a for-profit is the Statement of Financial Position and Statement of Activities for a nonprofit, respectively. A nonprofit may have a Statement of Functional Expenses and there is no equivalent report for a for-profit. A for-profit will have a Statement of Stockholders’ Equity whereas a nonprofit does not. A for-profit’s Stockholders’ Equity (total assets minus total liabilities) is reported as Net Assets for nonprofits. The “equivalent” portion of the Stockholders’ Equity for paid-in-capital and retained earnings, on a for-profit’s Balance Sheet, is broken down in several categories for a nonprofit and include 1) unrestricted, 2) temporarily restricted and 3) permanently restricted net assets (based on donors stipulations). The US tax status of for-profit and nonprofit organizations is a primary difference between the two types of entities. Nonprofits are exempt from paying income taxes (if approved by the IRS) whereas for-profits must pay income taxes on their annual net income. When you consider that most for-profit organizations can be subject to pay income taxes in the range of 25% - 35% of their net income, the amount of funds attributable to the payment of income taxes can be substantial. It is necessary to note that nonprofit status is a state law concept.  Nonprofit status may make an organization eligible for certain benefits, such as state sales, property and income tax exemptions.  Although most federal tax-exempt organizations are nonprofit organizations, organizing as a nonprofit organization at the state level does not automatically grant the organization exemption from federal income tax.  To qualify as exempt from federal income tax, an organization must meet requirements set forth in the Internal Revenue Code [2]. Also, nonprofit organizations, while having tax-exempt status, may be subject to federal, state and/or local taxes on unrelated business income (additional income not related to the primary focus of the organization). As previously stated, the primary mission of a for-profit is to generate profits whereas the primary mission for a nonprofit is to provide services to the community. There is also a secondary mission to both types of entities. A nonprofit’s secondary mission is to ensure that all revenues are greater than all expenses so that the services provided to the community/public can be maintained. A for-profit’s secondary mission is to sell their goods and/or provide services for revenue [1]. The types of revenue(s) and funding sources also differ between for-profits and nonprofits. Types of revenue for nonprofits include property taxes (governmental only), donor contributions, membership dues, program fees, fundraising events, grants and investment income. Revenue(s) for for-profits include sale of goods, fees from services provided and/or investment income [1]. A funding source for both nonprofits and for-profits is to borrow from lenders and issue bonds. In addition, for-profits can also issue shares of stock to infuse capital into the...
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