Similarities in Non-Profit and For-Profit Accounting 

Both types of organizations share many of the same basic accounting concepts, including revenues, expenses, assets and liabilities. Though they may use different terminology, the fundamental components of the financial statements are the same.

Looking at financial statements for both types of organizations will tell you:

• What the assets and liabilities of the organization are at a specific date
• The revenues and expenses of the organization over a period (usually a year)
• How cash has been generated/disbursed in the period
• Notes to the financial statements with additional explanatory elements.

Additionally, the reasons that both types of organization prepare financial statements can be very similar, including:

• To provide the organization’s stakeholders with an overall financial picture for the organization
• To facilitate the preparation of necessary tax filings
• To be in compliance with applicable legislation and regulations

Despite these many similarities, there also exist significant differences between the two. If accounting is a language, then for-profit and non-profit accounting are their own dialects. Having an accountant that is familiar with the appropriate framework is essential to ensuring accurate financial reporting.

How Non-Profit Accounting Differs from For-Profit Accounting 

Purpose of The Entity

The fundamental difference between a for-profit and non-profit organization is in the name – whether the purpose of the organization exists to generate a profit.

A for-profit company typically earns revenue by selling goods and services, with expenses incurred to increase revenue with a view to generating a profit. The focus of any financial decision is likely to be whether that decision will increase the organization’s profits.

In contrast, a non-profit organization can earn revenue through many different streams, including sales of goods and services, but also through fundraising, donations, and contributions from governments, for-profit businesses, and other non-profits. Unlike for-profit businesses, non-profits exist to serve some purpose besides generating profit.

There are nearly as many purposes for a non-profit as there are non-profits, but some examples of purposes would include to provide charitable services, to advocate for the interests of a specific group, or to represent a religious community. The key is that a non-profit does not exist for the profit of the people who control it.

Primary Objective of Accounting

The focus of for-profit accounting is usually, unsurprisingly, on profitability. Those reading the financial statements are often primarily concerned with determining whether the entity is profitable, in addition to assessing its ability to meet its financial obligations and the health of its assets. Hence, many accounting standards, including those on how to measure the value of an organization’s assets, when and how to record liabilities, and the appropriate timing to recognize revenues, are based on accurate measurement of a company’s profitability. Owners want to know the value of their company and the portion of the value that belongs to them.

The focus of non-profit accounting is usually on expenses. The organization’s benefactors, whether that be governments, other organizations or individual donors, want to ensure that their money is being spent to advance the organization’s stated purpose. The primary concerns of the users of the financial statements include assessing how the funds were spent, ensuring that the organization followed any restrictions made by contributors on funding, and determining whether the organization is financially viable in the short and long term.

Revenue Source: Restricted vs Unrestricted 

Revenues in for-profit organizations are recognized not when cash is received, but when goods and services are actually provided. For example, a company that collects deposits to deliver goods in the future has no revenues until those goods are delivered, even though they already have the cash.

There are similar but distinct rules for when non-profits are allowed to recognize revenue. Like for-profits, this may be when a good or service is provided. However, non-profits often have revenues which don’t follow the cash in exchange for goods or services model. For example, if a charity receives a donation from an individual or a contribution from a government, when should they recognize that as revenue? The answer in large part depends on whether the money came with any restrictions from the contributor. For example, a donor might stipulate that their donation be used to purchase food for unhoused persons, or a government might state that their contributions be used to support women’s health. In these cases, revenues are only recognized once the related restrictions are met by the organization, such as providing the service or spending the funds appropriately.

This model of recording revenue can become quite complex and requires that an organization keep careful records of where each dollar is spent so they can show funders that their contributions were spent the way they were meant to be.

Fund Accounting

Largely to assist in tracking the spending by category or purpose, many NPOs employ a model called Fund Accounting in their financial reporting. This means segregating the organization accounting into separate buckets (called funds) which are all tracked separately. For example, a charity that specializes in helping unhoused individuals may have separate funds to track the costs of running a shelter and to track the costs of community outreach. All the organization’s assets, liabilities, revenues, and expenses are separated into these funds and shown separately on the financial statements. This provides additional information to the users of the financial statements to see more clearly what purposes that organization’s expenses are fulfilling.

Special provisions for Non-profits

Accounting standards recognize that many non-profits are small with limited accounting expertise, and despite this, are more likely to be required to report their financial results publicly. With this in mind, there exist specific carve-outs for non-profits (especially smaller ones) that aim to simplify financial reporting, and which aren’t available to for-profit companies.

An example is the accounting for the purchase of capital assets. Usually, when an entity purchases a capital asset meant to be used over a period of years, like a building or a car, it does not deduct the full cost as an expense right away. Instead, it deducts depreciation each year based on an estimate of how long it will last. To keep things simple, smaller NPOs are allowed to instead simply deduct the full cost of a purchased asset in the year it is purchased.

NPOs may also find it difficult to put a dollar value on non-cash contributions like materials and services and have the option to avoid this by foregoing recording these contributions as revenue.

Different Terminology

While many accounting concepts are similar across for-profit and non-profit organizations, there can exist significant differences in the terminology used, which can be confusing for people with less experience in accounting. Below are a few examples of different terminology used for similar concepts:

Knowing these different terms, and what makes them similar (and distinct), is one of the keys to understanding non-profit accounting.

Contact McCay Duff LLP in Ottawa to Help You with Non-profit Accounting & Audit

At McCay Duff LLP, we have teams that specialize in non-profit accounting, working with  non-profits of all different sizes to help them meet their needs. We understand the particular complexities of non-profit accounting and have guided our clients through issues big and small. To learn more about how McCay Duff LLP can provide you with the accounting expertise, contact us online or by telephone at 613-236-2367 or toll-free at 1-800-267-6551.