Three significant distinctions help in distinguishing profit from nonprofit accounting, and these are the percentages in ownership, fund accounting, and the financial reporting process. In a profit accounting, sector entities or individuals can own certain portions of the shares often called the equity where the owner of the stake is provided with the records of his stock in the system of accounts. These values can either decrease or increase with time. The owners of these equities are entitled to dividends from the company proceeds. On the other hand, nonprofit is often owned by no one. Even the founder does not hold any percentage in the firm. The firm is usually run by a board of directors, other officers, public trust, and the staff. Therefore, there are no retained earnings accounts or any owner’s equity.
The other significant difference lies with the fund accounting wherein the profit accounting, expenses and revenues are tracked concerning the sales of the products. This then forms a single balanced account that gives the image of the company as a separate entity. Whereas the nonprofit accounting do not sell commodities and thus the tracking system is carried out through an ordinary chain of accounts often called the general ledger. They are mainly made of grants and donations from sponsors and well-wishers.
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Finally, the generation of the financial reports by profit accounting is done through the balance sheet that would reflect what kind of assets the firm owns. This notion is based on the fact that the assets can be distributed as the retained earnings to the firm’s shareholders. On the other hand, nonprofit accounting system only keeps the statement showing their financial position that reflects the assets available for extending the mission of the organization. They also track the excess of their revenues over the same expenditures.
