Accounting Short Answers

Accounting Short Answers

Accounting Differences

Nonprofit and for-profit organization's major difference is that nonprofit organizations focus on maximizing their mission while for-profit organizations focus on maximizing their profit. Nonprofit organizations typically receive revenue from outside sources, such as grants, fundraisers, contributions, and government programs. For-profit organizations receive revenue from generating a profit. Both organizations must abide by different accounting rules and regulations.

For-profit organizations prepare an income statement and balance sheets while nonprofit organizations prepare a statement of financial activities. For-profit organizations require accountants to create, balance, and maintain budgets for the organization to work with. Nonprofit organizations only require accountants when taxes need to paid. Both organizations must pay taxes on their net earnings and require an accountant to work with the internal revenue service to complete because of their differences.

Importance of Audits

Audits are becoming increasingly important in the nonprofit sector because nonprofit organizations need to be transparent on the spending of revenue. Nonprofit organizations require audits and regulations to ensure that they are spending cash appropriately, and making the proper decisions based on the resources and support available. Audits allow nonprofit organizations to demonstrate their effective governance and management of resources provided. Audits and audit committees are used to compensate for poor training, understaffing, and lack of control (GuideStar USA, Inc., 2012).

Nonprofit organizations are not immune to fraud or abuse. To minimize the opportunities for fraud and abuse, nonprofit organizations need strong board leadership and independent audits (LaRosa Jr. & Zikmund, 2010). Nonprofit organizations are typically criticized for possessing weak internal controls. For this reason, the community asks for stronger accountability with audits (GuideStar USA, Inc., 2012). Audits are becoming key aspects of nonprofit governance and internal accountability.