The difference between profit & NFP accounting

Green overhead road sign with the instruction to get in lane with a For Profit or Non Profit

Accounting is a critical component of any organisation, regardless of whether it is for-profit or not-for-profit accounting. The accounting practices differ between these two types of organisations, particularly in Australia.

Understanding these differences is essential, as they can impact decision-making, financial reporting and regulatory requirements.

Profit and not-for-profit organisations in Australia have different accounting requirements and financial reporting obligations. It’s important to know what is the difference between profit and not-for-profit accounting.

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The key difference between for-profit and not-for-profit entities

Simply put, a for-profit organisation seeks to maximise its financial returns and profits for its shareholders.

In contrast, a not-for-profit entity aims to fulfil its charitable or social purpose by using its revenue to fund its community-focused activities and operations.

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Not-for-profit accounting reporting

One of the main differences between the two accounting types is how the entity reports its revenue.

For-profit organisations generate revenue from the sale of goods or services. They must report their income and expenses under the Australian Accounting Standards, governed by the Australian Accounting Standards Board (AASB).

In contrast, not-for-profit organisations generate revenue from donations, grants and other sources of funding and use it to fund their charitable or social objectives.

Reporting on assets and liabilities

Another difference is the way that entities report their assets and liabilities. For-profit organisations report assets at their market value, while not-for-profit organisations report assets at their historical cost.

Similarly, for-profit and not-for-profit entities report their liabilities differently, with for-profit organisations reporting them at their current value while not-for-profit organisations report them at their future value.

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Not-for-profit accounting standards

Not-for-profit organisations in Australia have different accounting requirements, including a specific set of accounting standards known as the Australian Accounting Standards Board (AASB) standards.

These standards outline the financial reporting requirements for not-for-profit organisations, including presenting financial statements, recognising and measuring assets and liabilities, and disclosing information.

The AASB has proposed creating an additional General Purpose Financial Statements tier that intends to simplify the AASB reporting requirements for smaller not-for-profits.

The paper highlights the need for the reporting requirements to be a “simpler, proportionate, consistent and transparent framework for application by smaller NFP entities that meets the needs of users of their financial statements.”

NFP tax requirements

A critical consideration in not-for-profit accounting organisations is maintaining their tax-exempt status. In Australia, not-for-profit organisations must register with the Australian Charities and Not-for-profits Commission (ACNC) and comply with the taxation laws to maintain their tax-exempt status.

Failure to comply with these regulations can result in the revocation of their tax-exempt status, which can have significant financial implications.

In addition to these differences, there are different regulations and reporting requirements for both organisations.

For example, for-profit organisations must prepare and lodge annual tax returns with the Australian Taxation Office (ATO) and report their financial results to shareholders.

On the other hand, not-for-profit establishments must submit an annual information statement (AIS) to the ACNC, outlining their financial activities and charitable objectives.

Working with NFP accounting experts

It is important to understand these differences, particularly for those working in or with not-for-profit organisations, to ensure compliance with regulations and the proper reporting of financial information.

It is also essential to seek advice from qualified not-for-profit accounting professionals to ensure that the organisation’s accounting practices align with the appropriate standards and regulations.

Contact our team of expert accountants today to help you the way we have helped our other NFP clients.