A Not For Profit Organization Accounting Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

A not-for-profit organization, which also known as nonprofit organization is the organization that exists for educational or charity purposes, it uses surplus revenues to achieve goals rather than distributes the revenues as dividends. Nonprofit organizations serve in various sectors, such as religious, education, health, social services, commerce, amateur sports clubs, and the arts. For example, Universiti Tunku Abdul Rahman (UTAR) is a nonprofit organization which purpose is to achieve excellence in advancement and dissemination of knowledge and expertise, emphasis in nurturing and holistic development of individuals towards nation building.

However, a not-for-profit organization needs to generate profit in order to use for its self-preservation, expansion and also plans as it may hard to be operated without a sufficient fund. A nonprofit organization need to generate profit for the usage of its own expenses such as wages of employees, operations which include utility fees, and program expenses such as set-up fees of infrastructures or facilities. A nonprofit organization is required to utilize its resources very well and systematically to survive and expand due to mutual benefits or public needs.

In addition, a nonprofit organization needs to generate and retain its profit for emergence uses. In this challenging and competitive world, there are many unforeseen problems or barriers for an organization to survive and maintain, especially for nonprofit organization. This is because nonprofit organization does not have much profit and financial resources like a profit organization as a profit organization can gain more profit from its products or services and receive investment from many shareholders. Thus, if a not-for-profit organization does not have retained profit, the organization may hard to survive when facing political or economic problems such as government regulations, economic downturn, and inflation.

Besides, a nonprofit organization needs to generate profits in order to attract new investment from public to show society concern as donations are decreasing dramatically during recent years. Nonprofit organizations do not have commercial owners and must rely on funds from contributions, membership dues, program revenues, fundraising events, public and private grants, and investment income. With those investment, the nonprofit organization just can maintain its operation through reinvest the investment in organization and public, either to replace aging and worn out assets such as buildings, machinery, and equipment or to acquire new assets needed to expand the organization's operations such as a religious group, Christians are building a new and larger church to accommodate a growing congregation. A university may use its profits to provide free or low cost education to several or all of its students.

A not-for-profit organization needs to generate profit for dissemination of organization's information so that it can achieve organizational goals effectively and efficiently. Many nonprofit organizations have their own websites that have a great deal of information about their programs and finances. Most of the nonprofit organizations also publish annual report that typically includes a statement of the organization's mission and a summary of its programs, a list of board members and key staff, and financial information. Moreover, the nonprofit organization may need profit for advertising and promoting to raise funds.

Question 2

A conceptual framework can be regarded as an attempt to define the purpose and nature of accounting, The International Accounting Standard Board (IASB) provides the framework for preparation and presentation of financial statement for external users.

Conceptual framework is to assist IASB in promoting harmonization of regulations, accounting standards and procedures relating presentation of financial statements by providing a basis for reducing the number of alternative accounting treatment and selecting the most appropriate accounting treatment permitted by the international standards.

The conceptual framework is a guide for the development of future IFRS and the review of the existing IASs by setting out the underlying concepts. Besides, it also assists IASB in the preparation of financial statements in applying international standards and in dealing with transaction, events, conditions or circumstances for which there are not yet to form a subject of an IAS.

In addition, conceptual framework also to assist users of financial reports in interpreting the information contained in financial statements prepared in conformity with financial accounting standards. It also assists in developing national accounting standards which is in the national standard setting bodies. When preparing financial statements and other financial reports, the conceptual framework is a guide and a regulator of subjective judgment made by management.

The conceptual framework is also of value to auditors, and the users of financial statements, and more generally help interested parties to understand the IASB's approach to the formulation of an accounting standard. Moreover, those who are interested in the work of IASB, the framework would provide them those with information about its approach to formulating the financial accounting standards.

Thus, conceptual framework identifies a range of user group to ensure the framework provides useful information. The user group includes investors, lenders, employees, suppliers, other trade creditors, customers, government agencies and the public.

Question 3

Bookkeeping means recording of financial transaction which are occurred in a company. Bookkeeping is usually presented by a bookkeeper, people who also known as the accounting technician or the accounting clerk in the company. It might confuse many individual that the process of bookkeeping and accounting are the same, but actually both processes are different. This confusion is reasonable because of the accounting process includes bookkeeping function, but it is actually just a part of the accounting process. The accountants have to create reports from the recorded financial transactions which are recorded by the bookkeeper and file forms with government agencies.

There are some common methods of bookkeeping such as the single entry bookkeeping system and the double entry bookkeeping system. Besides, the bookkeeper have to perform the bookkeeping services that records the day to day transactions of the company like the sales, purchases, income, receipts, and other payments into the day books carefully. The bookkeeping services done by the bookkeeper bring the books to the trial balance stage in order to facilitate the accountants prepare for the balance sheet and also the income statement of the company as well.

Bookkeeping is very important in a business because it is a preparation of the financial statements. A business needs to know for the profit earned or loss during the year and its financial position at the end of year. Bookkeeping provides the information for the business to make decisions. The financial information and data are needed for cost ascertainment, planning, budgeting and forecasting. An accurate information will assist a company to see where the business is and where it is going to in the coming days.

Bookkeeping action help the company to report to the investors as well. It allows the business to share the information with the stockholders in order to keep them up to date and attract interested individual to invest in your business. Besides, bookkeeping helps to fulfill the company tax obligations, it helps to collect and verify the information needed to accomplish its annual taxes. The business expenses, profits and losses are the data must appear on the business tax return in order to verify the claims while the government conducts an audit on company's finances.

Double Entry System is a system where the transaction that impacts at least two different nominal ledger accounts. It records the transaction in the terms of debits and credits within the accounting equation (Assets = Liabilities + Equity). The sum of all the debits must equal to the sum of all the credits since a debit in one account will be offset by a credit in another account. So, the double entry system act as an error detection system in order to find out the error while the sum of debits not equal to sum of credits. This system is considered one of the most popular bookkeeping services. It assists to form a proper transaction in order to prepare a financial statement accurately. This system was first codified by Luca Pacioli, the person who held the accounting equation and served the system it as error detection tool.

The double entry system is important because it is a scientific system that has its own set of principles and rules. It records the financial transactions in systematic and chronological order with suitable narration. Moreover, this type of system helps to ensure the accuracy of the recordings n the transaction in order to ascertain the true profit or loss of a business by preparing the profit and loss account in a given period. Double entry system will reveal the information about the financial position of a business by preparing a balance sheet as well and it also provides certain essential information to different users for instance the owners, managers or creditors for their decision making purposes.

Question 4

The first advantage of regulating accounting information through accounting standard is to enhance the workflow of a common goal for business managers and owners. Individual represented by accounting workflow processes by which financial documents flow through a company. The internal documents relate with financial reports like balance sheet for business managers and owners, while for the external, economic market is the one of the documents information. Individuals tend to make the accurate and right decisions based on the accounting information system.

Next, the second advantage of accounting standard is comparability. Firms can compare their financial information for similar businesses in competition. Adopted accounting standards also would increase this ability to compare similar industries and make high return but less risk investment decisions through greater knowledge. It also will be more easier in the interpretation for financial experts all around the world and also indirectly increase in educated global investment.

Besides, one of the advantages of accounting standard is understandability. The accountants are required to follow the accounting standards that set up by FASB. Thus, the shareholders, investors or banker expect the firms to follow the same standard among all firms when preparing the financial statement such as balance sheet. Thus, the users could only use the same assumption to analyze or evaluate financial statements in the company. Hence, users just have to understand the same accounting standard instead of study different ways to record financial statement.

Next, another advantage of accounting standard is reliable. If the company got questions in account payable, the report is able to show them how that amount in account payable was calculated. Accounting standard also allows for easier payments made on accounts payable as a date is automatically chosen and checks for all bills. In accounting system, data has to make sense and required some documentation to support it. Thus, in accounting department, reconciliations are made in order to ensure the accuracy and reliability of the information from the company.

The last advantage is regulation of accounting information through accounting standards can increase the revenue and the number of shareholders. An accounting standard is designed to record and review all financial transactions among the business. Secretary of accounting department will key in all business transactions into a program and it will automatically post the transactions to the corresponding accounts. Thus, the shareholders can evaluate and analyze the company performance by reviewing the financial transactions from company. It can gain public confident toward the company as well as gain the increased number of company's shareholders.

On the other hand, the disadvantage of regulating accounting standards is it involves the inflexible framework. Accountant must follow the accounting standard all the time. That is very inflexible enough to deal with all of the problems that accountant face. At the same time, it will cause boredom towards accountant as they need to follow the guidelines every day.

The second disadvantage is regulation of accounting information through accounting standards required additional cost, time and effort to the company. When a company designs new procedures, it will require a large financial investment that includes employee labor costs, employee training fees, expenses to upgrade the new systems and so on. Therefore, the company has to spend a lot of time and money in order to apply new accounting standard.

Lastly, another disadvantage is accounting standard may also cause the problem of deal with the national, political and economic pressure. Based on this situation, there will be more difficult to comply and lead to additional complex and cost requirements. This is because of the vested interests in maintaining new accounting standard and practices which have developed from different perspectives.

Question 5

Historical cost is an accounting concept that values assets based on its original cost ignoring inflationary increases. When preparing the financial statement of a company, historical cost is recorded as the assets' original values, while fair value is abandoned. The historical cost method is used for assets in the U.S. under generally accepted accounting principal (GAAP). There are several advantages and disadvantages of using historical cost accounting.

One of the main advantages is historical cost is relevant in making economic decisions. In the decision making process, historical cost concept provides the manager with significant range of alternatives in recognizing, reporting and measuring economic information. It helps the manager to forecast the future prices based on past data. The primary function of historical accounting is to tell a user "the cost of a thing", not "the current value of a thing". Thus, historical cost is an important input for such cases.

Historical costs play an important role here preventing manipulation. Historical cost is based on actual transactions. The managers only have to record all the assets and liabilities at their acquisition price based on the evidence such as invoices and receipts. Hence they are measured and reported accurately. Historical cost is therefore mostly verifiable. Thus, this minimizes the risk of manipulation of figures by the managers.

Another significant advantage is reliability, which is one of the main characteristic is financial reporting. Financial statements based on historical cost have been found to be useful and reliable to the company's customers, proven by empirical evidence. Because there is only the historical costs method can provide exact information about the company's working.

However, historical accounting method does bring disadvantages. Firstly, historical accounting only interested in cost allocations and does not recognize the current market value, which makes this as the disadvantage. It ignores the possibility of the asset value is getting higher or lower than the real cost in the future, while it tells the user the obtainment cost of an asset and its depreciation in the following years.

Another main criticism of historical accounting method is its significant flaws due to inflation, which is rise in prices for an asset. An asset purchased at past may be expensive in future. The traditional accounting principles record all assets at an original cost and continue to use these historic figures throughout the asset's life. In addition, all the companies in the market might not receive the same effects of inflation and historical accounting become almost unhelpful when comparing corporate performance.

Moreover, the disadvantages of historical cost accounting include the fact that historical cost accounting values can relate to transactions that might be transacted long time ago. It's true that some businesses have old equipment and old inventories that are still working well, but the problem is that the acquisition value may be out of date compared to the current value, and so the balance sheet is showing outdated values for that particular asset. This affects the real value of the company, therefore may influence the market shares' value.


st Accounting, Retrieved Nov 6, 2010, from http://www.termpaperwarehouse.com/essay-on/Historical-Cost-Accounting/25737

Term Paper, Limitations of Historical Cost, Retrieved Nov 18, 2009, from http://www.termpaperwarehouse.com/essay-on/Limitations-Of-Historical-Cost/21523

Yahoo! Answers, Disadvantages of historical cost accounting? Retrieved June 11, 2007, from http://answers.yahoo.com/question/index?qid=20070610130244AAokziU

Duncan Williamson, Brief Notes on Historical Cost Accounting, Retrieved Feb 27, 2003, from http://www.duncanwil.co.uk/historical.html

Oppapers.com, Advantages and Disadvantages of Historical Cost Accounting, Retrieved Nov 16, 2006, from http://www.oppapers.com/essays/Advantages-Disadvantages-Hstorical-Cost-Accounting/99620