Are Accounting Treatments for Profit and Non-profit Organisations the Same?

Are Accounting Treatments for Profit and Non-profit Organisations the Same?

A profit organisation, or a for-profit organisation, is a legal entity that runs its operation intending to generate profit for its owner. Conversely, a non-profit organisation has an objective of serving society. Hence, it is clear that the profit organisations have a profit motive, whereas non-profit organisations have a service motive.

One may run a profit organisation in many forms of business entities. Some of the examples include sole proprietorships, partnerships and company. There are many choices for those who run a non-profit organisation too. Public hospitals, clubs, societies and trusts are some of the common ways one can set up a non-profit organisation. As the form of organisation is different, there are some dissimilarities in terms of the party that manage them too. For the profit organisations, the management of the organisations is the responsibility of the sole proprietor, the partners, or the company directors. For non-profit organisations, committees, trustees, or the related governing bodies are responsible for the management.

Speaking about non-profit organisations, most people would think that such organisations do not earn any profit from their business activities. This is not true. In fact, similar to the for-profit organisations, non-profit organisations would make a profit too. However, they are different in the way they handle the profits they have earned. Now, let us have a look at how the profit and non-profit organisations differ from each other in terms of the way they handle money associated with their business.

To establish an organisation, the founders or the business owners must look for funds before they can commence the business. Profit and non-profit organisations will treat this differently. To start running a profit organisation, the owners have to inject capital into the business (Also see Do You Know What is Pad-in Capital?). In contrast, non-profit organisations may obtain funds from the subscription, government grant, donation and so on.

Besides, their sources of revenue are different too. As we all know, the source of revenue of profit organisations comes from the sale of goods and services. Contrarily, non-profit organisations earn revenue from sources like subscription, donation and membership fees.

Here comes the part that most organisations may need to get assistance from a professional accounting firm in Johor Bahru: the financial statements. The financial statements that the profit organisations need to prepare are the balance sheet, profit and loss statement (Also see What is the Relationship between the Profit and Loss Statement and the Balance Sheet?), as well as the cash flow statement. On the other hand, similar to the profit organisations, the non-profit organisations need to prepare the balance sheet too. What is different is that the non-profit organisations need to prepare the income and expenditure account as well as receipt and payment account, instead of profit and loss statement and cash flow statement.

The accounting treatments for the money they have earned over and above are not the same too. This amount is called “profit” in a profit organisation, and it will transfer that sum to the capital account. For a non-profit organisation, that sum of money is known as “surplus”, and the organisation should transfer it to its capital fund (Also see Introduction to Capital Account).