Both for-profit and nonprofit businesses use three basic types of financial statements – the balance sheet, profit and loss statement and cash flow statement – to help make decisions that affect operations. Different businesses or organizations may call these statements by different names; however, their purpose is similar. Unlike for-profit businesses, government agencies and non-profit organizations use financial statements to show accountability rather than profitability.
While for-profit businesses use a general ledger – an account that shows assets, liabilities and fund balances – nonprofit organizations and governments can use more than a single fund. A company’s general ledger includes all its financial accounts and statements, whereas nonprofit organizations and government agencies may use several categories of funds. In order to meet the special reporting requirements of multiple funders, these entities must be able to separately identify how the money it receives is spent. Instead of showing profit and loss, financial reporting for nonprofits and public agencies focuses on surplus or deficit. Fund accounting gives organizations and agencies a better idea of what resources they have available.
The income statement, also known as the profit and loss statement, shows whether a company is operating at a profit. It records revenues and operating expenses. Investors, lenders and government agencies are some of the entities interested in knowing whether a company is operating profitably or at a loss. Companies must show service and sales revenues in the period when revenues are earned or when products are delivered. A business may not necessarily receive payment at that time. Both small businesses and large corporations in the manufacturing, wholesale/retail and service industries use the income statement to measure growth, set prices, cut expenses and set dividends. Non-business organizations, such as nonprofits and government agencies, use a statement of financial activities or a budget report in place of the income statement. Like the income statement, the statement of financial activities shows an organization’s income and expenses for a particular period.
The balance sheet provides an idea of a company’s financial status at a given point in time – whether monthly, quarterly or at the end of the calendar or fiscal year. The balance sheet is a statement showing a company’s total assets and liabilities during that period. Most companies that need to provide financial reports to outside entities include balance sheets in their financial statements. Industries involved in profit-making activities must show operating costs in the form of sales and expenses. When it comes to public agencies, the statement of net assets is used in place of the balance sheet. The statement of net assets focuses on whether assets are restricted or non-restricted, which determines whether resources must be used only for a specific purpose. In the nonprofit sector, the balance sheet is known as the statement of financial position, which like the balance sheet summarizes an organization’s general financial position at a certain point in time.
Cash Flow Statement
A cash flow statement is different from an income statement in that it shows if a company generated cash instead of whether it made a profit. The cash flow statement looks at a company’s cash from operating, investing and financing activities. Companies often use cash flow statements to show changes over time. Cash flow statements look at the flow of cash in and out of a business, nonprofit organization or government entity. Nonprofit and public agencies refer to the cash flow statement as the statement of cash flows.
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