A Not Profit Organization Accounting Essay

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1.) A not- profit- organization is formed to serve public or mutual benefit other than the accumulation of profits for owners or investors. It is an incorporate organization which exists for educational or charitable reasons, and form which its shareholders or trustees do not benefit financially. Many non- profit organizations also seek tax exempt status, and may also be exempted from local taxes including sales taxes or property taxes. Well- known non- profit organizations include Habitat for Humanity, the Red Cross, and United Way. Generally, a non-profit organization is defined as an organization that does not generate profit, but, they actually need to generate profit in order to continue their operation.

A non-profit organization needs to generate revenue to pay its employees. A complete organization is made up of the management group and workers. The management group will plan and manage the operating system of the organization and the workers will lead and control outcome objective planned by the managers. Hence, salaries are paid as rewards as workers have been contributed their effort to maintain and improve the operation of the organization.

A non-profit organization has to generate profit to cover the operating costs. Quite a huge amount of capital is needed to generate an operation of a non-profit organization as it is more likely providing kind of charitable services. Hence, profit is needed to ensure the organization can be going on and maybe could be expanded in the future. If there is only expenditure but no income, an organization might be bankrupt. Profit is important to balance the output of an organization.

A non- profit organization has to generate profit to improve management skills and operation skills of the workers and managers. Management skills and operation skills is important in an organization, to make sure an organization is well organized and having potential to be expanded in future. Well-trained, skillful and knowledgeable workers are needed in the effort of improving an organization. Thus, skill-up courses and workshops are needed to train the workers. Hence, there have to be a budget from a company to be for employees training purpose to produce more creative and innovative workers.

2.) Conceptual framework is fundamental, in the sense that other concepts flow from it and repeated references to it. It will be necessary in establishing, interpreting and applying accounting and reporting standard. Conceptual framework is intended to act as a constitution for the standards-setting process or provide a basis for the creation of accounting standards to guide in resolving accounting disputes that arise during the standard-setting process by narrowing the question to whether or not specific standards conform to the conceptual framework. The Conceptual Framework helps a better understanding of accounting information included in general purpose financial reports and, in turn, their confidence in IFIs. Additionally, the Conceptual Framework is aimed at many other benefits including the following:

The Conceptual Framework promotes harmonization by providing a basis for selecting the most appropriate accounting treatment permitted by the financial accounting standards. Harmonization of accounting standards ensures reliable and high quality financial reporting. It enables systematic review and evaluation of performance of a multinational company that has subsidiaries and associates in various countries. It can prove to be crucial to the economic and financial development of a country.

The Conceptual Framework assists users of financial reports in interpreting the information contained in financial statements prepared in conformity with financial accounting standards. It provides an understanding of the principles on which they are prepared. Each national standard-setting body has its own conceptual framework providing the foundations on which its accounting standards are based. Many commentators believe that harmonizing these frameworks should be the priority in developing globally accepted standards.

The Conceptual Framework is a guide for the development of future financial accounting standards. It is used as references for future identification and interpretation of the major financial statements information. Owners or investors need financial information relating to the entity to assess how effectively the managers are running it and to make judgments about likely levels of risk and return in the future. Shareholders need information to assess the ability of the entity to pay them a return dividend. The same applies to potential shareholders.

The Conceptual Framework is a guide and a regulator of subjective judgment made by management when preparing financial statements and other financial reports. It provides information for managers and accountants to help them to compare varies of company between past and present. So, managers can see whether they need to make any judgment through the information. The accuracy and completeness information are very important for them to do any decision.A judgment made could be more precise and it could prevent a management making a wrong judgment on an accounting statement. A management would be able to make a more accurate decision through observations and interpretations, driven by conceptual framework on a right path, to prevent an unfair judgment.

The adoption of the asset-liability view in the original Conceptual Framework has had a significant effect on financial reporting standards and has led FASB to eliminate many of the deferred charges previously recorded in the balance sheet. It act as a substantial progress of accounting cognition and serve as a groundwork for the revolution of financial reporting standards through the adjustment of the asset-liability view. The asset-liability view act as a departure from the usual view that accounting should target on the analysis of earnings through the matching of costs with revenues. The asset-liability view is based on the logic that it is essential to define and measure the beginning and end points, the balance sheet of a transition before measuring the transition which is the income statement itself.

The Conceptual Framework makes standards setting more efficient by providing a common set of terms and premises for analyzing accounting issues. Each time a argument on an accounting issue happen, it is not essential to reinvent the wheel. FASB and the IASB expect a common Conceptual Framework to promote the convergence of U.S. GAAP and International Financial Reporting Standards (IFRS), ultimately leading to a single set of high-quality global accounting standards.

The Conceptual Framework assists national standard setting bodies in developing national accounting standards. In the process of development, conceptual framework can be used as a guideline to make sure the development of national accounting standards is on the right track.The development of a conceptual framework allows effective communication between academics, who often speak different languages and make implicit assumptions and concepts unconsciously without consideration of other readers.

3.) Modern day bookkeeping

Bookkeeping is a document to gather historical data for used in prediction and analysis of business. Bookkeeping have evolved directly from "method of Venice" system by Frater Luca Pacioli. The book was titled "Summer de Arithmetic, Geometry and Proportion." the major impact from the book is on mathematics area, and basis of modern bookkeeping. However, Benedetto Cotrugli wrote "Of Trading and the Perfect Trader", a book that summarized a simplify double entry bookkeeping concept that is still be used today by the modern day bookkeeper.

The evolution of bookkeeping in medieval times included some necessities, Recording of facts in a common language, Wealth and the existence of credit, Exchange of money, Organized, wide-spread commerce and Property rights and changing ownership. Bookkeeping has evolved from clay tablets to paper ledgers, and now is computerized systems.

Importance : The utmost importance for a real estate holding is always up to date their financial history. Apart from this, there is several importance of bookkeeping.

First importance is Capacity of human beings is limited; we can't remember all information and always forget in short time. According records help us remembering and reminding.

Next is preparation of financial statements, business needs to know its financial position and the profit or loss during the year. Bookkeeping records offer data for preparing income statement and also position statement.

In additional, financial information and data are needed when making decisions. For example, planning, forecasting, budgeting and cost ascertainment.

The forth importance is needs of tax authorities. To have an authentic and reliable tax liability, book-keeping records is attach importance by tax authorities.

Double entry system

Single-entry bookkeeping system known as Incomplete records, is a method of bookkeeping maintain its financial information depand on one sided accounting entry. Single entry system evolute from original simulate three-pillar balancing and Four-pillar balancing to apply the Tripod bookkeeping. Nowadays, double entry bookkeeping system be the useful method in bookkeeping.

With double entry bookkeeping, all transactions must recorded in two above accounts. Using double entry allows large organizations keeping more accurate record. That's why many organizations dedicate themselves to provide double entry accounting services.

Importance : The first importance is Systematic. Double-entry system provided a systematic technique from recording financial transaction. Beside that, it also has sequentially order in time with proper narration of the financial transaction.

Double-entry system record details of financial transactions. That's why we can find the necessary information from the bookkeeping for use of reduce cost and others.

Next, accuracy is another importance of double entry system. "Every debit amount there is a corresponding credit amount" based on double entry principle. This can help to make sure the recordings of financial transactions always high arithmetical exact.

Double-entry system provides necessary financial information for making decisions by a business. Beside that, other users such as creditors, owners and managers also can get information from double entry system for their own purposes.

4.) One advantage of using accounting standards involves the evaluation of managerial ability. Accounting standards are beneficial in measuring the efficiency of management concerning the solvency, liquidity, profitability and overall progress of the company. Without the accounting standards, it would be hard to determine the managerial efficiency, because there is no source of contrasting the financial results of one company with another. Each company would develop its own standards or regulations to set its purpose to provide a true and equitable view of the functioning of an company to the users of accounting information.

The second advantage is the liable of understanding the financial statements. The accounting standards which published to required processes for businesses or company to follow. Companies are expected to follow the published accounting standards when composing financial statements. These users depend on the supposition set in the accounting standards when explaining the results reported. Once the users understand these suppositions, they will use this knowledge when reviewing any financial statement.

Next, accounting standard helping in improvement of the reliability and credibility of financial statements. The accounting standards providing a uniform structure of uniform guidelines and thus created an environment of confidence for the users of the accounting information. In this way the financial statements show a fair and true view of the operating results of a business organization and financial position.

The following advantage is additional disclosures. There are certain areas and conditions where important information is not required to be published by law. Standards require of additional disclosure such as the methods of depreciation used and transform of method depreciation which support the users of financial statements to make important financial decisions.

The last advantage is comparability. The value of accounting information is enhanced if it can be compared lightly in the same classification or line of business activity. The comparability is probable only when same type of accounting standards are used in the preparation and arrangement of the financial statements of different firms or company but in the same industry.


A disadvantage of using accounting standards involves the in the mechanical approach. There may be a trend away from flexibility and towards rigidity in applying the accounting standards on their business. Some commentators have a sensation of the professional judgment should be applied on technical matters.

The second disadvantage is inflexible framework. Accountant must comply with different experiences faced by different company. The accountant must make the fit of the guidelines of the published accounting standards with company's unique experiences and integrate both of it.

Another disadvantage of using accounting standards is the standard is different from law. Accounting standards cannot override or lay over the legislation. The standards have to be framed among the range and scope of prevailing legislation. Moreover, standards may be affected by drum up support of some organization or government pressure.

The next disadvantage is the costs for the company to implement with the standard. Company need to consider the requirements of the accounting standard, what actions that company required to take to comply with the standard and how much the cost will be. In many cases, the company must design new procedures to execute the achievement of account standard. Company needs a large financial investment that includes system upgrades, employee labor costs and employee training.

The last disadvantage is difficult choice. There are some existences of arguments to recommend the alternative solutions to certain accounting problems occurred. Thus, the choice between different alternative of accounting solutions may become difficult and complicated.

5.) Historical cost are also known as the original cost. The assess that we gain is equally to the amount cash or cash equivalents when we pay. Liabilities in the normal business activities may be exchange to pay the amount in cash or cash equivalents.

Current cost accounting is also known as market value accounting and it also a valuation method whereby assets and products used in production are valued at their actual or estimated current market prices at the time the production takes place

There have four merits and four shortcomings of the historical cost accounting concept. The first merits of historical cost accounting concept are it has a less scope for manipulation because historical cost is not only possible transactions, it is based on actual. The managers have to reported and measured dispassionately from recording all the liabilities and assess at their acquisition price. Therefore it is verifiable for minimises the risk of manipulation of figures. Secondly, historical cost accounting provides an important scope of alternatives in measuring the economic information , reporting and recognising to managers. According to the past information, it helps managers to estimate their future operational cost , it can affects the selection and valuation of decision rules. The next merit is useful for control purposes, the goal of accounting is major involving the stewardship function of management in conventional accounting. The income statement provides the proof for determining how effective management has achieve its responsibilities and accountability is necessary form record of past transactions . The last merit of historical cost accounting is certainty and simplify, most entities will know that what they have purchases or paid for the assets because the accounting procedures simplified, without having to regulate the accounts. Also that, they know what interest they received in exchange for their obligations easily.

The shortcomings of the historical cost accounting concepts as follow, the first shortcoming is the historical cost method does not report the true economic value of financial instruments and the adjustment of the accounting value of an asset or liability with its market price takes place only in certain situations, principle when the company can demonstrate that the value of the asset or liability has been changed permanently. Secondly, the historical cost method is apathetic to changes in purchasing power of the currency, overstating earnings in periods of rising prices and understating the degree to which capital assets maintain their value. The following shortcoming is the corresponding, historical cost accounting becomes ineffective in economies exhibiting hyperinflation and the legality of historic accounting rests on the supposition which the currency are recorded remains stable in the transactions. The last shortcoming is the method is too simplistic for complex transactions. For example, the firm may have interest rate swap commitments it to pay large amounts even though the historical cost of the swap is zero.

The merit of current cost accounting is relevant for decision-making purposes, compare with historical cost financial reporting, the market value of current cost accounting is good to presents the economic reality of transactions ,therefore it tends to provide more relevant and useful information. The financial statements of firms should describe the underlying economic reality of the firms rather than the summary of past transactions because the business environments are changing rapidly and becoming volatile. The market value of financial reporting is more reliable than historical cost statement although it may less reliable due to the subjectivity of some measurements. The other merit is it provides a better measure of efficiency, before they sold, current cost accounting gives a separation of profit which arises from holding assets. This will reflects the results of asset management decisions and also will impact on the firm of the environment but not reflected in transactions. The last merit of current cost accounting is enhance the understandability of the report, because it retains the familiar with the current purchasing power unit of the nature of nominal monetary units of measurement, the method of valuation of its assets are usually accepted by the users of the original cost accounting statements.

The shortcomings of current cost accounting is open to subjectivity, in most instances current cost is not based on actual transactions when used. It is hard to determine the exact current value. When no market prices are available or appraisals, calculations of reproduction cost and use of index number will be necessary for the assets. So that, current cost can to be verifiable and objective, the availability and accessibility of market price are needed a standardisation of the method. The last shortcomings of current cost accounting is only relevant for short-term decisions, it is show that investors use current cost information in their short term portfolio decisions . It also concluded that current cost information does not seem to be the driving force. Share returns in long run of current cost financial data is less closely associated than historical data. So, there was no convincing proof that individual current cost adjustments play a important part in the dividend decision.