PART 1

Prior to beginning work on this discussion forum, read the article Cracking the Nonprofit Accounting Code.

Based on the information presented in the article, discuss:

• How and why does the accounting system used by governmental/nonprofit entities differ from the system used by for-profit entities?
• How does the annual financial report of a governmental/nonprofit entity differ from the report of a for-profit entity?
• The user of a for-profit financial report is usually interested in the bottom line, net income. What are some top interests of the user of the financial reports of a governmental/nonprofit entity?

PART 2

State or local government entities can engage in governmental activities as well as business-type activities. Provide two examples of each activity type. Discuss how and why accounting and financial reporting differs between the two types.

Answer preview

Government or nonprofit organizations are not entirely interested in making a profit, so they use fund accounting as their accounting system. However, for-profit organizations’ main aim is to make more revenue (Hall & O’Dwyer, 2017). In revenue recognition, for-profit organizations must report revenue and associated costs in the same accounting period because revenue and expenses are reported simultaneously, which makes it easy for the management to know if they are making a loss or a profit. The rule is exactly the opposite with nonprofit accounting as they record everything, even the cash not in hand. For-profit entities, the funds are not restricted. They can use the cash to pay employees or invest in new ventures. However, the funds are usually restricted for nonprofit entities, and a go-ahead permission must be given to use them. Most nonprofits don’t pay taxes, while for-profit entities paying tax is mandatory.

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