For-profit Vs. Non-profit: The Difference In the Accounting System

All forms of businesses, even nonprofit businesses, need some kind of accounting system in place to compute and monitor their financial conditions. However, when doing the documentation in a system for accounting, nonprofit businesses handle things differently from businesses based on profit. Although they are both bound by the same universal principles for accounting, nonprofit organizations use their accounting systems, more, to manage their funds.

Accounting for nonprofit organizations is, basically, a fund management type accounting system, while businesses that operate for profit use a more commercial type of accounting system. A fund management type accounting system is focused on how the collections are being used; while a commercial type accounting system computes for the company’s gains and losses.

Whereas accounting for profit based companies utilize only one general ledger for all the transactions of each company, accounting for nonprofit organizations utilize more than one ledger depending on how many projects they fund or how many temporary investment instruments they use to keep their floating funds. With fund management type accounting, nonprofit organizations utilize and classify each donation or fund source based on the limitations set by each donor or group of donors.

When doing accounting for nonprofit groups, you need a system that could help you administer a variety of funds and fund types. With this system, a firm accounting nonprofit organizations must also have the ability to track grants, contributions, financial aid, and more.

Accounting for nonprofit organizations is done because of each organization’s accountability to its donors rather than for any form of profitability. It is imperative, therefore, for nonprofit accountants to make sure that every cent donated to the organization is accounted for and reflected on various detailed reports. From these reports, generated by accounting, nonprofit organizations reveal how the funds are used by providing each donor or fund provider their own unique report to them their money is still utilized according to their instructions.

Since accounting for nonprofit organizations requires more control over a wide and varied area of responsibility, purchasing the right software system will help you to streamline your procedures in this type of accounting. Nonprofit organizations should, however, make sure that the software they purchase is actually designed for the nonprofit industry.

Source by Tom Hope