We are now in a position to distinguish between both the types of organizations- Profit-making and Not-for-profit. The differences are tabulated below.
|Profit-making Organisations||Not-for-Profit Organisations|
|Prime Objective||To earn profits||To render services to its members and the society|
|Source of Income||The main source of income is sales and purchase of produced goods and services||The main source of income is donations, subscriptions, entrance fees, grants, etc.|
|Funds||Funds consist of capital contributed by the owners, accumulated profits and reserves||Funds consist of capital/general funds (donations, grants, subscriptions, etc.)|
|Profit or Loss v/s|
Surplus or Deficit
|The final net result of these organizations are expressed as profit or loss.||The final net result of NPOs is expressed as surplus or deficit.|
|Performance||The performance of these organizations is assessed by profit or loss that is revealed by Profit and Loss Account||The performance of these organizations is assessed by surplus or deficit revealed by Income and Expenditure Account|
|Financial Statements||Financial statements of these organizations comprise of:|
• Trading Account
• Profit and Loss Account
• Balance Sheet
|Financial statements of these organizations comprise of:|
• Receipts and Payments Account
• Income and Expenditure Account
• Balance Sheet
|Distribution of Profit|
or Bearing of Loss
|Profit (or loss) is distributed (or borne by) among the owners of the organization||Surplus (or deficit) is not distributed among the members of the organisation|
Interest on Capital
Any interest paid on capital is considered as an expense and is shown in the Profit and Loss Account. Treatment of interest on capital in the final accounts is as follows.
Interest on Drawings
Treatment of interest on drawings in the final accounts is as follows. Firstly, interest in drawings is shown on the credit side of the Profit and Loss Account.
What is Operating Profit?
Operating Profit can be defined as the profit earned by carrying the normal business activities. It is computed by subtracting the operating expenses from the gross profit.
The balance sheet is the last financial statement that is prepared by any organization. This statement helps to ascertain the true financial position of an enterprise at the end of an accounting period
Profit and Loss Account
A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.
What are Adjusting Entries?
In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.