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bookkeeping you know what it is but do you know how it differs when it comes to your non-profit versus bookkeeping for a small business it's not the same and those differences matter [Music] hi I'm Greg McRae founder and CEO of foundation group and welcome back to our 501c3 University Channel where we strive to make non-profit issues understandable today we're taking a look at bookkeeping now every company in existence whether it's large or small for-profit or non-profit they all have to keep track of their financial picture and while many things are the same between commercial and charitable entities other elements are very different indeed I'm going to dig into seven different areas of bookkeeping to examine what those differences are and why it matters to you and your non-profit in each of these I'll talk about the business side first followed by the non-profit side now let's go our first difference is related to the nature and purpose of the organization for a business their primary objective is to make a profit their transactions are largely driven by sales expenses Investments and returns their aim is to generate more Revenue than expenses and that's pretty much it it's not much more complicated than that on the other hand a non-profit exists to fulfill a specific mission or purpose rather than earning a profit money is going to come in through donations grants membership dues maybe even the sale of goods or services and that's called program Revenue assuming that the sales activity is directly related to the charitable purpose we've got an entire video on program Revenue that we'll link below so essentially business Revenue has a profit motive attached to it and non-profit Revenue should be all about purpose fulfillment issue two is revenue recognition now for a business revenue is recognized when a product is sold or a service is rendered for example when somebody buys a product the transaction is recorded as revenue for the business now that can look very different depending on whether the organization uses the accrual or cash method of accounting but that's a conversation for another day Revenue recognition is more nuanced for non-profits they categorize donation and or Grant income as either with donor restrictions or without donor restrictions this distinction is essential because certain funds can only be used for specific purposes as designated by the donor recognizing these differences ensures that funds are used appropriately and transparently program Revenue recognition more closely resembles that of a commercial business however as usual we've got a video on restricted funds so check out the link below issue number three is financial statement terminology now the common financial statements for businesses include the income statement sometimes called the profit loss statement the balance sheet and the cash flow statement for non-profits the terminology and presentation are different the income statement is often referred to as the statement of activities the balance sheet is referred to as the statement of financial position instead of an equity section on the balance sheet nonprofits have net assets which appear on their statement of financial position which is further categorized based on donor restrictions the cash flow statement is similar to that of a business but might have specific line items related to donations or grants issue number four is the tracking of equity versus the tracking of net Assets Now owner's equity that represents the ownership interest in the business if you're looking at a company's balance sheet Equity is what's left over after you subtract the sum total of the debt from the sum total of the assets Equity is what's left over assuming there is any It's Not Unusual to see some companies with more debt than assets resulting in a negative equity position in a non-profit we're looking at net assets not equity and that's because there's no owners of a non-profit therefore no one has an equity stake you may want to check out our video on the concept of non-ownership to learn more about that topic but just because there is no equity that does not mean that a non-profit can't have more in assets than in liabilities frankly a healthy non-profit should be in that position and when they are what's left over after you subtract the debt from the assets is called a non-profit's net assets and going back to a conversation point we had earlier you often will see net assets divided into two line items net assets with restriction meaning they can only be used for predetermined purposes by the donor and net assets without restriction which can be used for any legitimate purpose issue number five is related to the last one and that is profits versus surpluses given how these points have been going so far I'm guessing you can probably figure out which one is which before I even say so but I'm still going to say it small businesses aim to generate profits which can be reinvested into the business or distributed to owners or shareholders profit is why the owner is in business to begin with and the larger the business the more important this is in fact publicly traded companies are required by law to consider profit maximization as a key mandate when non-profits have more Revenue than expenses this results in a surplus not a profit this Surplus is typically reinvested into the organization to further its mission on a side note this is where we run into some really weird Notions that are surprisingly common in the nonprofit world one of those is this idea that a 501c3 nonprofit needs to zero out at the end of the fiscal year so imagine your non-profit is going to end the year with a ten thousand dollar Surplus this zero out myth says that you've got to spend that down so as to break even and not have a profit so see where this is going not have a profit not for profit non-profit you would be shocked at how pervasive that one is please do not spend down your Surplus January 1 is going to be a very difficult day if you start the year with no money number six is the issue of taxes profits earned by small businesses well they're subjected to taxes the exact nature and rate of that tax depends on the business structure whether that's a sole proprietorship a partnership or a corporation non-profits if they secure tax-exempt status they don't pay taxes on income related to their mission however they must adhere to specific guidelines including filing appropriate returns like the IRS form 990 which provides a detailed Financial overview of the organization's activities some nonprofits like private foundations they may pay a small amount of excise tax on investment earnings but that doesn't remotely compare to the tax burden commercial businesses face the seventh and last issue we'll examine is the question of securing professional assistance a is really where we have to collapse the differences between a for-profit business and a non-profit organization when it comes down to this topic the best practice is the same for both bookkeeping and accounting are exact sciences that do not lend themselves very well to Amateur hour unless you have someone in your organization who's an expert in bookkeeping it is critical to enlist the services of a professional both non-profits and businesses are required by law to keep accurate Financial records do not take chances on a do-it-yourself solution that will cost you in the long run see our video on why your non-profit needs professional help for your books like the rest of them we'll link it below well I hope that helps you understand just some of the differences between bookkeeping for businesses versus the same thing for non-profits yes similarities abound but the differences are real and consequential thanks for watching now go serve your community hey do me a favor and don't navigate away just yet we would really appreciate it if you would hit the like button below as it really helps get our content recommended to more people subscribe if you haven't already as we have great content coming your way on a regular basis finally you can click the little bell icon to be notified of new content when we post it to learn more about Foundation group you can visit us on the web at .501c3.org thanks and we'll see you next time foreign [Music]