Introduction
This paper seeks to detail the differences in theory and reporting between government/not-for-profit accounting from for-profit accounting. The paper will also attempt to make out the differences in the classifications of accounting.
Analysis and Discussion
Organizations as classified according to purpose
The differences between not-for-profit (NFP) accounting from for-profit (FP) accounting come from the differences in the purposes of the organizations using the same. With the differences and purposes, it would be easier to know their differences and in practice or the ways, reports come about.
Basically, organizations are divided into profit and non-profit ones, where the FP organizations would therefore refer to those organizations which do not have profit generation as their primary purpose. These organizations may include government institutions, religious organizations, and charitable institutions. Since these organizations are for the benefit of their members or beneficiaries, they therefore will make sure that members or beneficiaries are served first before they will think about profits. Profits refer to the excess of revenues over expenses, thus non-profit organizations would not be much concerned if revenues exceeded their expenses because they do not distribute profits to members.
FP organizations are motivated to produce profits because it is the major reason why stockholders or owners put their money or investments in the business. Leaving them alone, these business people would just have kept their money in the bank and without them doing anything, they could still earn money. They, therefore, consider investing as earning more money, and if an organization in which they have invested could not produce profits; they would rather keep again their money at the banks or look for other investments
The difference in Financial Reporting
FP organizations actually aim to attain the objective of earning and maximizing profits. Profit maximization is also a necessary objective because of the presence of competing alternatives that could provide various returns of investments to stockholders. As to how the owner will come to know whether profits are maximized or not, they need to have reports from management. Financial reporting would permit interested parties, particularly the owners, to know if an entity is performing adequately or as expected. Report users examine the net income or net loss for an accounting period using the company’s income statements. Income statements are required therefore from for-profit organizations and for filing with the proper government agencies.
On other hand, NFP entities do not aim to earn and maximize profits. They instead aim to determine whether they are effectively and efficiently providing a service or good with the limited resources that are available for use. Since NFP also uses financial resources, it does mean that they also need some revenues but earning or maximizing is not the primary purpose. Their resources therefore could come from donations as in the case of religious organizations and charitable institutions. In the case of the government, their revenues come from taxes paid by taxpayers. Taxes are considered revenues from the point of view of the government. While taxes of imposed or enforced contributions from taxpayers, revenues by other NFP organizations should be the result of a well –thought and well-executed strategy to eventually have profit or excess of revenues over expenses.
Although the NFP organizations have to make financial reports of their revenues and expenses, their purpose is not to emphasize the fact of their net profit or a net loss. It is therefore expected for this kind of organization to have a showing sometimes about the excess of expenses over revenues but it does not mean that the organizations failed in their missions or purpose. However, it could be taken as not commendable enough because of financial distress or reduced quality of their service that should be supported by non-financial data and statistics relating to the mission of the organization. For charitable organizations, it may even be a measure of success if more beneficiaries benefited from the funds donated by benefactors, and such could be a motivation to donate more if the financial reporting can show credibility and responsibility in the use of funds.
The difference in Annual Reports
FP organizations have their income statements, balance sheets cash flow statements in their annual reports are while NFP organization will have their statements of activities and statement of financial conditions in their annual reports. The differences of the reporting for the two classifications of the organization are best seen in their annual reports made to the government regulator, which is the Securities and Exchange Commission in the case of the United States.
Difference in Budgets
Budgets are used for internal reporting in the case of the FP organizations and in many NFP organizations, except in the case of the government. Congress may have said budget converted into an appropriation law to be an approved use of funds from the expected revenues for the applicable year. Generally budgets could help management of the organization other interested stakeholders to assess how an organization performs in accordance with forecasted expectations. The same budgets facilitate comparison of expense or inputs to revenues or outputs as a way to establish organizational efficiency and effectiveness. This is on the premise that all classifications of organization even the NFP should ideally have higher revenues over expenses but as earlier presented there are many factors that could explain disparity in the actual result of income statements or report of income and expenses for the period which could provide sufficient justification why variances were noted.
Since forecasts would always be about the future, it is always possible to expect the estimates were wrong. However, at the time that they constituted part of the budget, these forecasts have served as ways of controlling operation since they were expected to serve as guide. Thus in the case of the government, it could happen that the same could incur budget deficit, a condition where the actual expenses have exceeded actual revenues. For government planning, a budget deficit could be a material issue because the same could produce inflation and higher interests rates in the economy and whose effects would be very burdensome to many people including both the profit and non-profit organizations.
Since a budget is an internal document, which is prepared and seen only by compensated management in the case of FP organizations, the same is normally not made available to investor or the public. Aa the same budget will show the anticipated revenues or sales and the expenses associated with the said revenues, management responsibility could be yet as effective when they have made their results whose result would appear in the financial statements in the Annual Reports that are filed quarterly and yearly to the US SEC.
The board of directors may require the budget presentation from its corporate officers during the meetings of the board as “blue print” for operations for the coming period. The forecasted revenues in the said budget could assess whether forecast are being made realistically, pessimistically or optimistically and from their management may be evaluated on how it evaluates economic variable and how it respond to the same in accordance with short terms and long term plans of the organization.
Because of the nature of NFP organization, the budget would be very critical to the management even if the is used usually and strictly internal to the organization. This could gleaned from the fact the budget will more or less provide anticipated amounts of contributions, grants, revenues, from services or goods, and other items which the organization would use. The said expected amounts would be the equivalent amounts of sales or service revenues in the case of FPs.
As the primary document will guide – entity’s operations and managerial decisions about goods and services to be provided for an accounting period must have to be within the budget. For the organization to assume otherwise that it may have revenues which would not be forth coming, would be very dangerous and could put the very sustenance of the organization in a an uncertain decision, it must be remember that NFP could only as effective as they are accomplishing their purpose with given resources.
Difference in Accounting Standards used
As the reports of each classification of organization differs, so with accounting standard used by each classification. The funds in the NFP organizations as approved by the board of trustees are to be treated separately as those funds, which are restricted by donors. NFP organizations therefore have their unrestricted fund as approved by the board of directors, which can be spent with no restriction or for specific purpose. A hospital for example may generate unrestricted fund from patient services and from unrestricted donations. The moment however those donations are restricted as when donated lands on condition that they be used exclusively for the erection of hospital building, the same cannot be used contrary to condition or restriction as it may mean cancellation of the donation that could deprive the organization of its benefit.
Reports about the fund guided by generally accepted accounting principles (GAAP). In the case of government accounting, there is separate government accounting standards from those of private NFP. In the case of FP organization, they funds, assets, liabilities, equities, revenues and expense accounts must comply with the standards set by the FASB or Financial Accounting Standards Board (FASB) or the International Accounting Standards Board (IASB), which is based in UK. The US FASB calls the standards as GAAP, which is different from those NFP, while the IASB calls them as International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS). Both classification of organization however use accrual accounting.
Differences in taxation
FP organizations which may include sole proprietorship, partnership or corporations are normally subjected in income taxes by the Internal Revenue Service (IRS) while NFP organization are normally tax-exempt except when they derive revenues unrelated to their main purpose as non-profit organizations.
Conclusion
Either FP or NFP classification of an organization exists for a purpose, which will determine the nature of financial reports that each classification will produce. The nature of the financial reports also made FP and NFP determines the differences in the kind of reports submitted and the accountings standards in the preparation of their reports. Even if both classifications have budgets, their purpose still determine the relevance of their budgets in controlling and influences their operations. The two are also found to have differences in tax treatments as far as their income and revenues are concerned. The differences in their purposes however create synergies in the satisfaction of human needs and wants as those than cannot be met by FP organizations could be met by NFP organizations. No wonder, tax exemption is given to non-profit as an incentive to achieve what cannot be achieved by FP organizations.
References
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