People create nonprofits to provide services that promote the public good in fulfillment of a specified mission. Nonprofits do not have owners. Instead, any and all benefits generated go to the community or people served. Conversely, for-profit companies exist to generate income and provide wealth for their owners. As a result of the differences in perspectives, the financial reporting requirements also are different.
In general, the Internal Revenue Service, federal agencies and states hold nonprofits to a higher reporting standard than for-profit non-public companies. Because nonprofits have no owners to report to, they must report information to their constituents -- those served, those who could be served and those who support the organization. Because these people, unlike owners, are generally not involved in the business, nonprofits must provide enough details for the general population to understand. This is akin to publicly traded for-profit companies, which are held to higher reporting standards because anyone can buy stock in their companies. Public companies must file a litany of financial and information reports for public viewing.
Because most nonprofits receive money from various sources, including private foundations, individual donors and government agencies, nonprofits are required to file tax return information reports with the IRS. The IRS makes these reports publicly available online for viewing. Many states require nonprofits with as little as $100,000 in donations to submit audited financials to the state. In addition, many grant providers require quarterly and annual reports from nonprofits. These reports typically include financial and program performance information.
For-profits use balance sheets, but nonprofits use a statement of financial position. On the balance sheet, assets equal liabilities plus owner's equity. Nonprofits have no owners, so the statement of financial position shows net assets instead of owner's equity. Both show assets and liabilities -- what the company owns and owes -- at a specified point in time. Liabilities include accounts payable, lines of credit and term loans. In addition to cash and cash equivalents, buildings and equipment, nonprofit assets also include grants and pledges receivable.
Where for-profits generate income statements, nonprofits produce statements of activity. Income statements show what a company sold and spent over time and the statements of activity show what a nonprofit raised and spent. Both show how well a company manages its business. The revenue sources differ between the two. A for-profit sells products and services, but nonprofit revenue sources generally include grants, donations, dues and event-related contributions. In addition, a nonprofit must separate its activities -- revenue and expenses -- into unrestricted, temporarily restricted and permanently restricted categories based on the donor or grantor's intent.
The statement of cash flows shows a company's cash inflows and outflows over a specified period. Both for-profits and nonprofits generate cash from three areas --operations, investing and financing. Investing records the purchase or sale of long-term assets. Operations show fundraising or revenue generating activities. Financing records the proceeds of new loans and retirement of old loans. For for-profits, financing shows any equity contributions or sales, but for nonprofits, financing shows any permanently restricted asset activity.