It is important to have financial statements for any transactions involving money. It is important to have financial statements, regardless of whether you are non-profit or for-profit. A financial statement is a great tool for accounting and accountability. This helps you track your progress year after year. This article aims to contrast non-profit financial statements with those of for-profit organizations.
The “matching principle” governs the revenue-related differences between non-profit and for-profit financial statements. It also applies to financial statements for for-profit organizations. This principle requires that for-profit organizations report both their revenue and associated costs in the same accounting period.
If an organization has reported revenue for December, then the cost of goods must be included in the financial statement. Non-profits may be able to make a pledge that will later be redeemed. Consider a situation where a donor has pledged US$2,500 to be paid in four installments over a period of two years, which would amount to US$1,250 annually.
The total US$2,500 must be recorded by the non-profit organization in the year that the pledge was made. This is even though the cash has not been received. It must be recorded in your financial statement. When the cash is finally paid, it goes into your account without changing your financial statement.Also read: Top 10 Web Hosting Companies in 2021 | Detailed Review
The tax report is a major difference in the financial statements of non-profit and for-profit organizations. The financial statements of non-profit organizations are expected to reflect their tax returns. However, it is not the case for a for-profit. While non-profits are most commonly known to be exempt from tax, this exemption is only available after certain obligations have been met with the right authorities.
However, non-profits may be required to disclose their tax returns in financial statements. The financial statements of non-profit organizations can sometimes be complex. A non-profit’s tax report is often viewed in relation to the issues it was established to address.
A non-profit organization that provides disaster relief will not be expected to tax donations for humanitarian causes. If other revenue-generating aspects are implemented, however, the tax will be paid and reported to the organization. One example is a workshop that makes crafts to raise money during the Giving Season.
Non-profit organizations must also pay payroll tax to the government. However, employees still have to pay income taxes. These taxes can all be included in a non-profit’s financial statement.
A balance sheet is an example of this variation. While it’s fine for non-profits to refer to it as a balance sheet, they prefer to call it a statement of financial position. Asset distribution to shareholders is another area of differentiation.
Non-profits cannot have shareholders, but only board members. Therefore, assets that are retained earnings for shareholders are not shown in the financial statements of non-profit organizations. However, the balance sheet of for-profit organizations does not contain such an asset distribution declaration. However, it is possible to have assets of non-profits reinvested to fulfill its charitable mission in the future (financial).
Another tool that distinguishes a for-profit from a nonprofit is the income statement. For-profits are known to keep track of all income, revenue, profit, and loss. Non-profits, however, are not required to record income.
Instead, you’ll see the statement of activities for non-profits. This can be reported in a financial statement. This report shows the non-profit’s net assets and the expenses and contributions received for the year. Non-profit organizations can now focus on the future with this tool.Also read: 10 Best Saas Marketing Tools And Platforms For 2021
Non-profit and for-profit organizations prepare financial statements that are focused on certain attributes. Non-profit organizations care more about accountability than for-profit organizations. However, they are more concerned with profitability. This is evident in the question of restricted or unrestricted funding. Non-profits are not allowed to spend funds on business processes they consider profitable.
There are occasions when grantors can decide how and when donations should be spent by non-profit organizations. These situations require that the financial statements reflect undeniable accountability. The non-profit must classify all donations to ensure proper tracking. This will ensure that the organization doesn’t waste funds on things other than the purpose for which it was created.
Due to multiple rounds of restricted funding, the financial reporting system for a non-profit may be more complex than that of a for-profit. Given the above, it is fair to state that non-profits cannot always draw a budget around finances. However, for-profit organizations have this option. If restricted funds are involved, funds cannot be just allocated to a cause.
Your financial statements are crucial for sustainability and growth as a manager or administrator of a non-profit. This is especially true if your organization relies on grantors and companies for funding. This statement will help you understand the level of accountability that your organization must follow. You must be able to clearly understand the various ways that you will be held accountable for your non-profit or for-profit organization.
This will give you an understanding of the complexities involved in preparing your future non-profit financial statements. You can also be guided to the differences between non-profit and for-profit financial statements.
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