Speaker 1: 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. 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 and 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, non-profits 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 non-profit world. One of those is this idea that a 501c3 non-profit needs to zero out at the end of the fiscal year. So imagine your non-profit is going to end the year with a $10,000 surplus. This zero out myth says that you've got to spend that down so as to break even and not have a profit. 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 non-profits, 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. This 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 www.501c3.org. Thanks and we'll see you next time.