Is a Statement of Activity the Same as a Profit and Loss?

Many individuals searching for information on financial performance reports often encounter two distinct terms: “Statement of Activity” and “Profit and Loss Statement.” While both documents summarize an entity’s financial performance over a defined period, they are designed for different organizational structures and employ specialized terminology. The confusion stems from their shared goal of presenting an organization’s financial inflows and outflows. Understanding the nuances between these statements is important for anyone seeking to interpret financial health accurately. This article will clarify their distinctions and conceptual similarities.

Understanding the Statement of Activity

A Statement of Activity is a financial statement primarily utilized by non-profit organizations. Its purpose is to illustrate how an organization’s net assets, similar to equity in a for-profit entity, have changed over a specific accounting period. This statement reflects how resources were acquired and used to advance the organization’s mission, offering insight into the stewardship of funds and the financial impact of operations.

The statement’s key components include revenues, which can come from diverse sources such as contributions, grants, program service fees, and investment income. Expenses are categorized by their function, distinguishing between program expenses directly related to the mission, management and general expenses for administrative overhead, and fundraising expenses. The “bottom line” of this statement is the change in net assets, indicating whether the organization’s net assets increased or decreased during the period. Non-profit entities prepare this statement using the accrual basis of accounting, aligning with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 958, which outlines financial reporting for not-for-profit entities. Net asset classifications include with donor restrictions and without donor restrictions.

Understanding the Profit and Loss Statement

The Profit and Loss Statement, often referred to as an Income Statement, is a financial statement used predominantly by for-profit businesses. Its primary objective is to report a company’s financial performance over a specific accounting period. This statement details the revenues earned and the expenses incurred to generate a profit or loss, indicating the company’s overall profitability and how efficiently a business operates and manages costs.

Key components of a Profit and Loss Statement begin with revenue or sales, representing income from the company’s core business activities. Directly related to these sales is the cost of goods sold (COGS), which includes the direct costs of producing the goods or services. Subtracting COGS from revenue yields the gross profit, a measure of profitability before operating expenses.

Operating expenses, such as selling, general, and administrative (SG&A) costs, are then deducted to arrive at operating income. Other income and expenses, like interest income or expense and gains or losses from asset sales, are included thereafter. The final figure, net income or net loss, represents the profit or loss remaining after all revenues and expenses, including income taxes, have been accounted for. For-profit businesses prepare this statement on an accrual basis, adhering to generally accepted accounting principles (GAAP).

Distinguishing the Statements

While both the Statement of Activity and the Profit and Loss Statement report financial performance over a period, their core purposes and the types of organizations they serve differ significantly. The Profit and Loss Statement measures profitability for for-profit businesses, showing how effectively they generate wealth for owners and shareholders. Conversely, the Statement of Activity demonstrates the change in net assets for non-profit entities, reflecting their accountability for funds used to achieve a mission rather than to generate profit.

Terminology also distinguishes these reports. The “bottom line” of a Profit and Loss Statement is “Net Income,” whereas the Statement of Activity concludes with “Change in Net Assets.” The concept of “equity” on a for-profit balance sheet corresponds to “net assets” on a non-profit’s statement of financial position. While both statements deal with revenues and expenses, classifications and titles often vary; for example, “Contributions” are a common revenue source for non-profits, while “Sales” characterize for-profit revenue.

The primary audience for each statement also differs. Investors and creditors use the Profit and Loss Statement to assess a company’s financial viability and potential returns. Donors, grantors, and the public review the Statement of Activity to understand how a non-profit is utilizing its resources and fulfilling its stated mission. Despite these differences, both statements are prepared over a specific period, utilize accrual accounting, and provide insight into how an organization’s resources are generated and utilized.