Have you ever wondered how not-for-profit organizations are not-for-profit? Or how not-for-profit organizations can operate at an accounting profit but still be considered a not-for-profit organization? Over the year’, not-for-profit organizations have had many changes in rules and regulations set forth for not-for-profit organizations to abide by. There are three major financial statements involved with not-for-profit organizations and one voluntary financial statement, plus four key governmental and federal agencies involved with not-for-profit accounting. There are some key differences between not-for-profit organizations and for-profit businesses. Also, how not-for-profit organizations can keep a tax exempt status. I did not realize there were so many parts that go with not-for-profit accounting. It takes a lot of work to keep not-for-profit organizations going not just internally but externally as well. When people are willing to put in time, effort, and money it is what helps not-for-profit organizations be so successful.
In order to maintain not-for-profit status, organizations must follow a strict set of a guideline’s, set forth by federal and governmental agencies on their financial statements and of the accounting basis.
A not-for-profit organization is defined as, “an entity that possesses the following characteristics: (1) receives significant resources from donors who do not expect equivalent value in return; (2) operates for purposes other than to provide goods or services at a profit; and (3) lacks an identifiable individual or group of individuals who hold a legally enforceable residual claim. Entities that fall outside this definition include all investor-owned enterprises and other organizations that provide economic benefits to the owners, members, or participants.” (p. G-12) A for-profit organization is a business whose main goal is making a profit. Non-profit and for-profit have a broad similarity; they both operate at a profit. However, there are many differences between nonprofit and for-profit organizations. Some of the major differences are nonprofits, if approved by the Internal Revenue Service (IRS) are exempt from income taxes. For-profits have to pay income taxes. The revenues for nonprofit organizations are donations, membership dues, program fees, fundraisers, and grants. Revenues for for-profit organizations are the sale of merchandise, fees from services, and gains on investments. Nonprofit’s main financial statement is a Statement of Financial Position. The Statement of Financial Position reports assets, liabilities, and net assets. A for-profit’s main financial statement is a balance sheet. A balance sheet tells you a company’s assets, liabilities, and shareholder’s equity at a certain point in time.
There are three financial statements that are required for all not-for-profit organizations and one that is not required but many organizations use it. The first statement is a Statement of Activities. The Statement of Activities is to show revenues, expenses, gains, losses, and reclassification. Usually in the Statement of Activities expenses and revenues are reported in gross and gains and losses are reported in net. Also, it shows the changes in net assets and by their change in class either by unrestricted, temporarily restricted, and permanently restricted. Unrestricted net assets are the total assets over the total liabilities that may be used at the will of the board. Temporarily restricted net assets are restricted by the donors. These assets maybe restricted for time, or plant acquisitions. Permanently restricted met assets are permanently restricted by donors. The second financial statement is the Statement of Financial Position. The Statement of Financial Position compares organizations totals, with assets organized to liquidity and liabilities. In the equity section of the statement, it separates totals for unrestricted,...