Difference between Profit and Nonprofit Organizations

Thu, 03/26/2015 - 05:14 -- Umar Farooq

What is Profit Organization

The basic objective of the trading concern is to provide goods and services for carrying profit or maximization of wealth for shareholders. It involves is certain lawful business activities.

What is a Not for Profit Organization

The basic objective of NPO organizations is to provide social services to those who either have less purchasing power or no purchasing power for utilizing those services. These institutions are financed by donation whether local or international donor agencies for example UNICEF, WFP, FFF Jordan etc. as purpose of non profit organization not to make profit, if its revenue is exceeded by its expenditure, it is treated a surplus and utilizing in coming years for providing more social services to the people.

Types of nonprofit organization

  1. Social welfare institutions, which work for society’s welfare, like clubs, social welfare associations etc.
  2. Charitable institutions which may be a hospital, educational institutions, religious institutions, libraries etc.

Differences Between Profit and Non-profit Organization

For Profit organizations

  1. Its main objective is to earn profit
  2. Main source of revenue is sale of goods and services  
  3. Its nature from ownership point of view may be a sole proprietorship, partnership or company
  4. It is started by the investment of sole proprietorship, partner or shareholders of the concern
  5. It is managed either by sole proprietor partner or directors etc.

Not for profit organizations

  1. It main objective is welfare of the society and members
  2. Main source of revenue donations, subscriptions, fees etc.
  3. Its nature from ownership point of view may be an association of person in the form of club society or trust etc.
  4. It is started by funds of the donations members subscription etc.
  5. It is managed either by committees, trustees or governing bodies etc.

Accounting of Non Profit Organizations

The basic purpose of accounting is to provide information to the interested parties. As the nature and objective NGO differ. The information required for both type of organization also differ. In case of trading concerns detailed set of accounts record is required, because the parties involved are interested in that information these parties may be investor creditors, banks, management etc. you have already studies the book of accounts.

Books of Accounts for NGOS & NPOs

In the non-trading concerns book of accounts differ from the trading concerns because here the parties involved are interested in different type of information. These parties may be government, governing bodies’ members of societies etc. These parties are interested in the organizations

  1. Receipt and payment accounts
  2. Income and expenditure accounts
  3. Assets and liabilities.

Difference in Accounting Treatment between Trading Concerns and Non Trading Concern

Accounting Treatment of Trading Concern

  1. A complete set of books of accounts is maintained
  2. Its main objective for maintain the accounts record is to know the profit or loss
  3. In this type of organization net income earned during financial period is distributed among the owners.
  4. In order to know the results of the financial year profit and loss account is prepared
  5. The result of the profit and loss account is treated as profit or loss
  6. Profit or Loss is transferred to capital account

Accounting Treatment of Non Trading Concern

  1. Only few books of accounts are maintained
  2. Its main object is to have check over the income and expenses
  3. In this type of organizations, if there is an excess of income over expenditure, is not distributed to anyone, but is used for the betterment of the public
  4. In order to know the result of the financial year income and expenditure account is prepared
  5. The result of the income and expenditure account is either called Surplus or Income over expenditure
  6. The surplus of income over expenditure is transferred to accumulated fund