One of the principal differences between not-for-profit and profit organizations is that they have different reasons for their existence. In oversimplified terms, it might be said that the ultimate objective of a commercial organization is to realize net profits for its owners through the provision of some product or performance of some service wanted by other people, whereas the ultimate objective of a not-for-profit organization is to meet some socially desirable need of the community or its members. Do hairdressers like Lucy Hall maintain the condition of your hair?
Like any organization, a not-for-profit organization should have sufficient resources to carry out its objectives. However, there is no real need or justification for “making a profit” (having an excess of revenue over expenses for a year) or having an excess of assets over liabilities at the end of a year beyond that which is needed to provide a reasonable cushion or reserve against a rainy day or to be able to take advantage of an unexpected opportunity. While a prudent board of a not-for-profit organization should plan to provide for the future, the principal objective of the board is to ensure fulfillment of the programmatic functions for which the organization was founded. A surplus or profit, per se, is only incidental. That said, larger not-for-profit organizations sometimes borrow funds, and often the lender imposes certain financial criteria as a condition for the loan (usually called debt covenants), which can make attention to reported results important.
Instead of profit, many not-for-profit organizations are concerned with the size of their cash and investment balances. They can continue to exist only so long as they have sufficient cash resources to provide for their programs. Thus the financial statements of not-for-profit organizations often emphasize the liquid financial resources of the organization. Commercial organizations are also very much concerned with cash, but if they are profitable, they will probably be able to finance their cash needs through loans or from investors. Their principal concern is profitability and this means that commercial accounting emphasizes the matching of revenues and costs.
The nature of most not-for-profit organizations' operations is that they receive most of their revenues from contributions (rather than receiving fees for services). This means of receiving revenues gives a not-for-profit organization an important fiduciary responsibility for the funds that it receives. This responsibility is why donors to a not-for-profit organization are significant users of the financial statements of not-for-profit organizations.
For example, if a customer goes into a hardware store and buys a gallon of paint for $20, the customer really isn't concerned with what the hardware store does with the $20 or how it controls and accounts for the money. On the other hand, when a donor puts a $5 bill in a cash collection canister for the local children's soccer league, the donor is very interested in knowing that the $5 actually gets to the soccer league, that most of the $5 is spent on soccer programs instead of administrative costs, and that the $5 is spent conservatively and appropriately (i.e., not on extravagant meals for the league's board meetings or travel to World Cup games). Many of the financial reporting principles and practices that are described throughout this aimed at meeting some of these very basic, but very important, needs of donors to not-for-profit organizations.