The primary difference between nonprofit organizations and for-profit businesses lies in the way they generate revenue. In a for-profit scenario, a company earns income by selling a product or service. Nonprofit organizations, however, generate revenue through fundraising, donations, and grants.
The way these groups generate revenue affects their accounting methods in several ways. These differences include:
- Taxation: For-profit companies make an annual income, which qualifies them for income tax. For the amount of money they make each month, they have to give a percentage to the government. Nonprofit organizations don’t make income but do earn funding, so they’re exempt from income tax.
- Reporting: For-profits and nonprofits both provide quarterly reports for what they’ve earned and spent. For-profits create balance sheets to track income gains and losses, while nonprofits compile statements of financial position, also known as statements of net assets. Since nonprofits serve a community, their primary focus is on delivering value rather than generating income.
- Budgeting: Funding can be inconsistent, so nonprofits must be prepared for financial fluctuations. For-profits typically rely on more stable earnings, which impacts the budgeting process.
- Ownership: In a for-profit scenario, individuals can own percentages of the company, known as equity. Since no one owns a nonprofit, accounting does not include owner’s equity or retained earnings.
What Is FASB Compliance?
The Financial Accounting Standards Board (FASB) is a nonprofit, private-sector organization that establishes accounting standards for both nonprofit and for-profit organizations. These standards aim to promote transparency for investors and other stakeholders, ensuring they understand how their funds are allocated and invested.
FASB compliance involves a wide range of regulations. These rules pertain to:
- Debt reporting
- Income taxes
- Equity and joint ventures
- Employee benefits and compensation
- Important term definitions
The FASB exists to encourage financial efficiency in the economy. When investors and contributors understand how nonprofit organizations and businesses utilize their funds, they can determine whether the investment is worthwhile. In the nonprofit world, organizations serve the community rather than reinvesting money directly in the economy. When donors can see the value of their gift, they are more likely to continue funding these programs, allowing the money to be reinvested in the community.
Maintaining FASB compliance is vital for supporting a functional economy. When it comes to accounting practices, processes should remain FASB-compliant to encourage continued growth. At Momentive, we make FASB fund accounting simple.
How Momentive Makes Compliance Easy
With MIP Accounting, our FASB-compliant accounting software, you can forego the intricacies of meeting regulations. Our accounting software generates FASB-compliant reports for you as you input your financial information. When you use our software solution, you can have the peace of mind of knowing that your reporting meets transparency requirements.
Along with FASB compliance, MIP Accounting® provides transparency for stakeholders, secures sensitive data, and maintains audit trails when needed. With all your financial information in one place, MIP allows you to streamline your nonprofit accounting process.
