Is Not For Profit Accounting different to For Profit Accounting?
The major difference between Not For Profit (NFP) and For Profit organizations is that, unlike For Profit businesses, NFP’s don’t exist to generate profits for their owners, they exist to address the needs of their communities whether they are members of a tennis club or consumers of healthcare services. A NFP does not have shareholders meaning an annual surplus will increase the net assets of the entity which will allow the organization to spend more funds in the future on providing goods and services to its community.
For Profit organizations track revenue and expenses usually related to the sale of products and services.
A NFP’s purpose is to address the needs of its community and/or society and most do not have an income stream from the sale of goods and services. Instead, NFPs may have a number of sources of income from donations, sponsorship, grants and government funding and many of these donations may be restricted, with funding like grants needing a self-contained budget authorizing the use of funds only for a specific purpose agreed upon in the grant contract. Thus the NFPs accounting system may need to track revenue and expenses via specific projects.
While a For Profit organization prepares a statement of financial position at the end of the year reflecting the amount of net assets which can be distributed to the shareholders, a NFP organization keeps a statement of financial position to reflect net assets that can be used to further the mission of the organization.
It’s important to remember that just because an organization is a NFP it doesn’t mean that the organization cannot generate a profit or a surplus, it simply means that any profit or surplus generated is retained by the organization. Like any organization a NFP should over the long term be aiming to at least break even and/or make a surplus, in order to continue operating and withstand any unexpected expenses, decrease in revenue or rising costs.
As a result of specific accounting standards, NFPs have different reporting requirements to For Profit businesses and must be registered with the Australian Charities and Not-For-Profit Commission (ACNC).