Key Differences between Not-for-Profit and Profit Organizations (3)

In commercial or business enterprises, there is no such thing as a “pledge” or a contribution. If the business is legally owed money, that amount is recorded as an account receivable. A pledge to a not-for-profit organization may or may not be legally enforceable, or even if technically enforceable, the organization may (for public relations reasons) have a policy of not taking

legal action to attempt to enforce unpaid pledges because they know from experience that they will collect them. This represents another accounting and financial reporting challenge for not-for-profit organizations.

Accounting Basis

Most medium-sized and larger not-for-profit organizations keep their financial records on an accrual basis of accounting. However, many smaller organizations still keep their records on the cash basis of accounting. For financial reporting in accordance with generally accepted accounting principles, the accrual basis of accounting must be used. However, if there are no requirements to issue financial statements in accordance with generally accepted accounting principles, the cash basis (or modified cash basis) may be sufficient for smaller organizations. The cash basis of accounting is a recognized “other comprehensive basis of accounting” and an independent auditor may opine on cash basis statements as long as the statements (and the auditor’s opinion letter) clearly indicate that the cash basis financial statements are not presented in accordance with generally accepted accounting principles.

Taken From : Wiley Not-for-Profit Accounting Field Guide 2003