Not-for-Profit Organizations Accounting versus Normal Business Accounting
There are a number of factors related to for-profit and not-for-profit business accounting that are virtually the same. For example, payroll taxes and reporting expenses and income are the same regardless of your charitable status. However, there are also a number of significant differences. These differences are related to the not-for-profit organization’s allocation of resources toward the charitable goal or mission they have. An example of this would be that not-for-profits have to itemize their expenses across management, program areas, and fundraising. These are referred to as the “functional expenses” and it is required that they are properly reported.
Organizations that are considered for-profit have to pay taxes on their net income; however, this is not the case for not-for-profit organizations if they are considered a registered charity and are tax exempt. If the goal of the not-for-profit organization is to increase the welfare of society as a whole, then the government will typically attempt to take steps to minimize the costs incurred by the organization. The tax exemption status of NPOs is the primary reason for differences in the accounting practices in these types of organizations.
Creating an allocation plan
Since not-for-profit organizations must report their functional expenses, it is also important that they create an allocation plan. This means that must establish a system that defines how expenses are allocated across various programs and functional areas. This can be useful when trying to determine the actual cost of an activity or program and when done properly, it provides a much clearer view of the finances of the entire organization.
Fund accounting concept
The primary difference that is present between a not-for-profit and for-profit organization is the fund accounting concept, which is focused on overall accountability instead of profitability. Profit entities will have a general ledger, which offers a single, self-balancing account, while not-for-profit organizations will have several general funds or ledgers. This is the framework that helps the organizations to keep their resources organized into separate accounts to identify the individual sources of the funds, as well as their uses.
Understanding the difference in the accounting practices is essential for any not-for-profit organization. Failure to employ the proper practices can create a number of accounting and tax issues down the road. In most cases, it will be smart to hire an accountant or bookkeeper with experience with not-for-profit organizations to ensure the books and finances are handled properly month-to-month.
Learn more about the special filing considerations for not-for-profit organizations by contacting Hogg Shain & Scheck today.