Differences Between Nonprofit and For-Profit Accounting

The differences between nonprofit and for-profit organizations are substantial – beginning with their core missions and extending into ethics, practices and accounting methods. Nonprofit organizations exist to meet the needs of society and to do good things for people without any monetary goals. As they are not earning revenue for profit, it is easy to see why the accounting methods would differ from those of organizations who are turning profits. While the accounting practices of these two entities share the same underlying goal – to keep track of financials and provide transparent feedback - the information that must be disclosed to the government is different. Let’s take a look at some of these key differences for accounting purposes:

Income Statement VS Statement of Activities

Businesses that operate for-profit must maintain an income statement (aka a profit and loss statement) that breaks down financial information regarding revenues and expenses. This statement will indicate whether the organization has a net income or net loss during a period of time – information sought after by investors and creditors alike. On the other side of things, nonprofit organizations maintain a statement of activities (SOA). This will include revenue (from all sources, such as membership dues, grants etc) as well as expenses. The SOA will showcase a nonprofits net assets and may indicate either a surplus or a loss.

Balance Sheet VS Statement of Financial Position

Financial statements must be prepared regardless of the entity classification. The main difference here is that for-profit organizations have owners and shareholders (or some do) and nonprofits do not have owners. So, nonprofits prepare a statement of financial position which outlines the net assets of the business (assets minus liabilities). For-profits must prepare a balance sheet (typically this happens quarterly), which also outlines their net assets. This sheet includes owner’s equity or stockholder’s equity and assets minus liabilities. Similar but different!!

Income VS Contributions

As we have already outlined, for-profit organizations exist for monetary gain and they receive income differently than not-for-profit organizations. While for-profits make money through aspects of the business such as sales of merchandise, service fees and shares of stock, nonprofits also receive contributions – monetary, physical and service based. A nonprofit can receive in-kind contributions, restricted and unrestricted contributions, grants and awards, membership dues, fundraising money and money from sales or merchandise. As all contributions to a not-for-profit are put back into the business for purposes of funding their chosen philanthropic avenue, this flow of assets is not classified as “income”.


Tax Status

One of the clearest differences between for-profit and nonprofit is the tax status of the organization. Nonprofits, once approved as a 501(c)(3) by the IRS, are exempt from paying federal income taxes. State and local taxes will vary from state to state. In addition, individuals who donate to nonprofit organizations will receive a tax deduction at the end of the year. All for-profit organizations are responsible for paying income taxes at local, state and federal levels.