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Does Non-Profit Mean Money Does Not Matter? - YouTube
Channel: Accounting Instruction, Help, & How To
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In this presentation we will take a look
at the question of, does not for profit
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mean that money doesn't matter. For a
not-for-profit type organization this
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can seem like a silly question.
Especially when we're talking about the
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accounting for a not-for-profit
organization but terms like
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not-for-profit can be taken out of
context and can be a little bit confusing
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as we compare and contrast them to
for-profit types of organizations. The
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answer to the question does not for
profit mean that money doesn't matter to
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it not-for-profit organization is, I'm gonna
say is, no. Then we might ask well why
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does money matter if the objective of a
not-for-profit organization is
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theoretically not-for-profit. The
reason money matters whether it be
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for-profit or not-for-profit is because
that's going to be our major measuring
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tool. That's what we're doing within the
accounting department. we're trying to
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measure the performance, how well
whatever the objective of the
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organization are doing.
the dollar is going to be our measuring
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tool. It's going to be our ruler in order
to do that so look at the similarities
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and the differences. Let's consider the
accounting equation. When we think of the
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accounting equation we think about
assets liabilities and equity for a
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for-profit organization. We typically see
the assets as what the company has,
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the liabilities are what the company owes
like loans accounts
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payable other types of notes payable and
then we have the equity and this is the
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value of the organization. Of course
the organization is owned by the owners
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and therefore this would be the net
value to the owners of the organization.
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The owners then have an objective to
regulate how the assets are used, how the
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liabilities are leveraged in order to
hopefully, increase the value or equity
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of the organization. The double-entry
accounting system for a not-for-profit
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organization or a governmental
organization will be much the same and
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it will still have assets, will still
have liabilities obligations. The
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difference between the two we're going
to call something like net position but
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in essence, we have the same thing as
equity. The difference between the two is
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that the equity represents typically the
value to the owner, whereas the net
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position, because we don't have a
particular owner that can claim value of
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the net position,
is the net worth, assets over the
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liabilities that can be used in the
future in order to achieve whatever the
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objective of the organization is. That
could be a charitable type of
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organization or whatever the services
that need to be rendered from the
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governmental type of organization.
Therefore the measuring of these
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resources are going to be measured in
terms of dollars. We're going to use
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dollars to measure assets, liabilities,
and the net value of the organization.
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The for-profit organization is going to
be heavily regulated by the market, by
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the owner of the company. If it's a
publicly-traded company we're talking
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about stockholders of the organization
and if we're talking about a
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governmental or not-for-profit
organization, we still need to measure
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this stuff. Even more transparentcy is needed
with the information. The money matters
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more and the measurement matters more in
some ways. We want to make it as
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transparent as possible because we don't
have these owners that are going to be
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as vigilant taking a look at the
measuring tools, the objectives being
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achieved within the organization through
that profit objective. We don't
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have the profit objective and therefore
the people that are donating to the
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organization aren't going to be the people
that are benefiting from the net
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position or at least not directly. In
other words, the people that are donating
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to a charity or the people
paying taxes may get benefits from the
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charity or from these services that a
government organization might provide
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but they're not getting the direct
benefit that's in proportion to what
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they're giving in terms of the taxes or
the donation as they would expect to
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have with regards to a for-profit
organization. Therefore the money, in
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terms of measuring with the money, is often more important to be really
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transparent, as transparent as possible,
given the fact that we have the less
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market pressure to make sure that
that money is being managed as well as
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possible. Wnother way to consider this is
with the income statement type accounts
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where we have revenue minus expenses
giving us in a for-profit net income.
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When we think about a for-profit type of
organization in terms of performance, how
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are they doing, we think about the income
statement. We think about how much
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revenue they are generating and how much
expenses they had to take in order to
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generate that revenue and then the net
income is what increase
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the value of equity of the organization.
That would be something that the
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owner would be very concerned with, the
stockholders in a publicly traded
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company, because that's going to increase
the value directly relational to the
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owners in a governmental or
not-for-profit organization. We still
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have revenue but the revenue is going to
be from donors or taxpayers or
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something like that.
We still have expenses but note that for
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a for-profit organization we can
basically think of those expenses as
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something that we needed to consume in
order to achieve the goal of revenue
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generation. When we think about the
expenses for a not-for-profit
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organization it may not have as
much of a link that the expenses are
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going to be related to the generation of
revenue as they would be for the goal of
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the organization. to achieve whatever social objective of the
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organization. However the difference
between revenue and expenses will still
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give us the the revenue over the
expenses, in essence the same type of net
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income type of calculation and those
resources the revenue over the expenses
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would be something that we can then
increase what would be similar to the
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equity section, or the assets minus the
liability, what we can then use in order
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to achieve the goals and objectives of
the organization. so it's still gooing to be
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necessary for us, probably even
more necessary for us, to concentrate
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more and be more transparent once again
in terms of what the revenues are, what
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the expenses are, and how we're expending
this money. The fact that the expenses
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are not tied to simply the goal of
revenue generation makes it a little bit
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more difficult for us to determine
whether or not those expenses are going
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to be worthwhile for us to be expending
in as opposed to it for a for-profit
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organization. The expenses are geared
towards the generation of revenue. We
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have a specific goal, specific objective,
and we have owners that are really a
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vigilant in terms of whether or not
these expenses are achieving that
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objective of revenue generation. Now we're saying we have expenses that
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may not be tied directly to the revenue
generation so we have to be more
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transparent to be able to see where the
spend, where these expenses are going, so
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that we can better make decisions,
so measuring in these items is
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very important. Also note that when we
think about these expense items we can
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also consider who is benefiting from the
the revenue and the money that's going
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through these types of organizations.
Clearly when we think of a for-profit
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organization, we consider the revenue
minus the expenditures that go in
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essence to the owner of the owner's value.
We could see
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directly that the bottom line of the
income statement is benefiting the owner
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when we consider the organization. In
terms of a not-for-profit or a
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governmental organization we see the
bottom line as basically increasing
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the value to the organization but it's
not being applied directly to a specific
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type of owner. However, we also have
within both of these types of
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organizations included in these expenses
things such as wages. When we consider
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the money that's being used we have to
consider the expenses, the value of these
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expenses, and make sure that those are
going to be valued well because
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with whatever organization we're
thinking about those expenses are going
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to be regulated on the for-profit side
by market pressure to see if they're
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justified in order to generate revenue.
The expenses with a governmental or
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nonprofit organization don't have the
same type of market pressure so
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determining what these expenses should
be can be a little bit more difficult.
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Included in those expenses
are wages. So a substantial amount of
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people of course make their money from
or earn a living through working for
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not-for-profit and governmental
organizations and we need to be able to
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measure and make sure we're as
transparent as possible to decide the
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proper types of expenses and how they're
being expensed. These are types
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of people are going to be
concerned with the allocation of
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resources because to the governmental
organization they are expenses to the
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organization's but to these individuals,
to the workers of the
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organization, it is revenue to them. We
want to make sure that the
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calculation of that revenue, the
application of the revenue is indeed
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important
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