Differences Between Nonprofit Accounting and Commercial Accounting

Accounting is a topic that is widely discussed in the business world. And this is no surprise, as businesses need to have ways to keep track of how much money they receive and how much they spend. They need to show their stakeholders that they are indeed profitable. Accounting is also an important issue for all kinds of nonprofit organizations. However, nonprofit accounting goes far beyond just tracking the amount of donations received. There are several differences between commercial accounting for businesses and accounting for nonprofit organizations, also called "fund accounting."

While the main objective of a business is to generate profit for its owners, a nonprofit organization needs to show its stakeholders, such as the donors, that the money they are given is well spent. This is why accountability and transparency is emphasized in the case of non profits.

Unlike in traditional business accounting, non profits use more than one general ledger, or fund. This is because there are often restrictions as to what can be done with certain funds. For example, in the case of an organization that provides aid to victims of natural disasters, there could be campaigns where donations are collected to provide relief to people of a particular geographic region. Therefore, donations obtained during this campaign would need to be segregated from all other funds, to ensure that donor restrictions are being followed accurately.

An organization could also receive an endowment, which is funds that would need to be kept intact, either perpetually, or until a certain date. Again, another accounting fund would need to be created which will keep track of the endowment fund and serve to ensure that the money is not being spent contrary to the restrictions.

In nonprofit accounting, a report would need to be periodically prepared for each of the funds in question, which will detail all revenues that come in and all expenses made. There would also be a general report made of all the organization's financial activities across every fund that it holds.

There are various ways to do nonprofit accounting for an organization. Some larger organizations hire the services of a group of professional accountants, which will keep track of all revenues and expenses for the different funds according to the principles of fund accounting. Smaller organizations could do their accounting in house, with the use of specialized accounting software that has been made to meet the needs of nonprofit groups.