Organisations are established to achieve specific objectives and can be broadly classified into Not-for-Profit Organisations (NPOs) and Profit Earning Organisations. Although both types of organisations maintain accounting records and prepare financial statements, their objectives, sources of income, and use of funds are different. Understanding the difference between these two types of organisations is essential for studying their accounting treatment and financial reporting
Not for Profit Organisation
It is an organisation formed to provide social, educational, religious, cultural, charitable, or recreational services to society. Its primary objective is to serve the public rather than to earn profits. Although an NPO may generate a surplus from its activities, this surplus is not distributed among its members. Instead, it is used to achieve the organisation's objectives and improve its services. Examples of NPOs include schools, colleges, hospitals, clubs, charitable trusts, libraries, and non-governmental organisations (NGOs).
Profit Earning Organisation
It is a business entity established with the main objective of earning profits by producing, purchasing, or selling goods and services. It carries out commercial activities to maximize returns for its owners or shareholders. The profits earned are either distributed among the owners or reinvested in the business for future growth and expansion. Examples include sole proprietorships, partnership firms, and companies.
Difference Between Not for Profit Organisation and Profit Earning Organisation:
Basis | Not for Profit Organisation | Profit Earning Organisation |
|---|---|---|
Motive | NPOs motive is to render services and for the welfare of the society. | These organizations are established with profit-earning motive. |
Funds | NPOs' source of funding includes donations, subscriptions, surplus, fees, etc. | Profit earning businesses are funded through the capital contributed by the proprietor and the accumulated reserve and surplus. |
Financial Statement | The financial transactions of NPOs are summarized and the financial statements are prepared in the form of Receipt and Payment A/c, Income & Expenditure A/c, and Balance Sheet. | The financial transactions of profit-earning organisations are summarized and the financial statements are represented in the form of Trading A/c, Profit & loss A/c, and Balance Sheet. |
Surplus/ Profit | The balance of Income & Expenditure A/c is either Surplus or Deficit. | The balance of Profit & Loss a/c is either Net profit or Net Loss. |