Your nonprofit organization exists for one purpose: to raise funds that will be distributed to individuals and entities that have a specific set of needs. Because of your tax-exempt status and your mission, you must follow a distinct set of accounting practices. Like for-profit companies, you may have employees, acquire insurance, and build marketing campaigns. You send invoices and pay bills, perhaps manage inventory and payroll, and create reports. One of the biggest differences between the two types of entities lies in the latter activity.

Both must provide financial statements. One of these is a Statement of Cash Flows, which both create. Two other reports, though, have different purposes and audiences. Where for-profit businesses generate a Balance Sheet, which lists assets, liabilities, and equity, your nonprofit prepares a Statement of Financial Position, which does not include the equity section. Instead, it has a net assets section. Rather than an Income Statement (Profit/Loss), you, as a nonprofit, are charged with creating a Statement of Activities. Both show income and expenses, but your income, of course, comes from activities like donations and fund-raising events instead of sales of products and/or services. You probably have similar kinds of expenses, like rent and office supplies, but your nonprofit must also account for your use of funds related to your organization’s mission.

Other Differences

• Though you don’t have to pay income taxes because of the tax-exempt status, you are still responsible for other kinds of taxes, like payroll, sales, and property.
• There are two types of functional expenses: support services and program services.
• You may have to declare unrelated business income if you receive funds not directly related to your charity’s cause.

Even though you’re referred to as a nonprofit, you are allowed to make a profit (have revenue exceed expenses).

Unfamiliar Territory