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The Differences between For-Profit and Not-For-Profit Accounting

When dealing with not-for-profit accounting and for-profit accounting there are many similarities. For example, the tracking and reporting of income and expenses, and payroll taxes, but there are some very important differences that make nonprofit organizations different from the general for-profit businesses.

The most notable difference is the functional expenses that the IRS requires nonprofits to report. Functional expenses include itemized expenses across management (general and administrative), fundraising, and program areas. The necessity to report these particular forms of expenses comes from the nonprofit’s need to push its resources towards the mission of the organization.

So what does this mean for not-for-profit accounting? It means that there has to be an established system that defines how you will allocate expenses across the functional areas and into the specific programs. An example of this would be if the administrative function takes up 20% of the office space, then you assign 20% of an expense such as paper to the administrative functional area.

To help determine how much a program or activity actually cost the nonprofit organizations can use a cost allocation plan. This plan when accurately done can give a clearer picture of the organization’s finances. Several acceptable methods can be used to determine the organizations finances. Two of these are applying direct/indirect costs, and allocations based on percentage of payroll or physical space used (like the example above). A combination of these is also acceptable, but to determine which is best for your organization consult an accountant.

Nonprofits also have to track revenue in the form of contributions. This included unrestricted and restricted funds, donated goods, in-kind contributions, pledges, etc. There also has to be a standard value placed on donated services. This is necessary to record donated services   such as volunteer time in the organizations financial statements.

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