Accounting Differences in For-Profit and Not-For-Profit Businesses
The biggest difference between Not-for-profit accounting and for profit accounting is the reason for the accounting and what is considered most important. For businesses, the main goal is to make more money than the owner’s put in, thus the highest return. In this way, the annual report of profit and loss will be the most important component of their accounting. Not-for-profit and government businesses are usually more interested in their duties to the public and how much can be done with the money they have. So for not-for-profits, the accounting of “the budget will take center stage” (Granof and Khumawala, 2011).
Because of the different goals for companies that are for-profit or not, their accounting needs and systems are different. Internal and external documents are different for the two, as well as who they are for. Not-for-profits use their budget as their main documentation and regular businesses focus on income. Assets are also coined differently because the value of the asset for not-for-profit may not actual bring in revenue, but cost money to operate. So the true value of the asset should be considered as to the service it provides the community. Business assets of a regular variety are shown at a value that could be resold and are depreciated accordingly. Regular business will use the method known as Finance Accounting and Not-for-profit companies will use an accounting system called Fund Accounting.
The accounting is also in a way backwards for each category. While profit businesses match their expenses with the income in which it was created, not-for-profit base their expenditures on how much income they have. Matching principles cannot be applied in the same way to not-for-profit, simply because their expenses are reliant on the amount of revenue coming in. For profit companies only incur expenses to make money, while not-for-profit spend what they have.
Granof, Michael &Khumawala, Saleha (2011) Government and Not-For-Profit Accounting.Concepts and Practices.5E.John Wiley and Sons, Inc