The primary difference between nonprofit organizations and for-profit businesses is the way they acquire money. In a for-profit scenario, a company earns income by selling a product or service. Nonprofit organizations, however, make money through fundraising, donors and grants.
The way these groups earn their money affects their accounting methods in a few 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 statements to track income gains and losses, while nonprofits compile net assets. Since nonprofits serve a community, their focus is on value instead of income.
- Budgeting: Funding can be inconsistent, so nonprofits have to be prepared for financial changes. For-profits typically count on more reliable earnings, which affects the budgeting process.
- Ownership: In a for-profit scenario, individuals can own percentages of the company, known as equity. No one owns a nonprofit, so 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 creates regulations for nonprofit and for-profit organizations. These standards focus on facilitating transparency for investors and other contributors so they understand how their money is spent.
FASB compliance involves a wide range of regulations. Some of 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 operations and businesses use their money, they can decide if the investment is worth it. In the nonprofit world, organizations serve the community rather than putting money directly back into the economy. When donors can see how useful their gift is, they continue to fund these programs, so the money returns to 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 MIP, we make FASB fund accounting simple.
How MIP Makes Compliance Easy
With MIP FASB-compliant accounting software, you can forgo 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 your reporting meets transparency requirements.
Along with FASB compliance, MIP Fund Accounting offers transparency for stakeholders, keeps sensitive data secure and offers audit trails when you need them. With all your financial information in one place, MIP allows you to streamline your nonprofit accounting process.