Yes, not-for-profit organizations need to generate profit in order to sustain their operation. First, we need to understand what is not-for-profit organization and profit. Not-for-profit organization is incorporate organizations which operate for charitable, education or social purposes. It provided that the shareholder or trustees do not expect any repayment and do not earn profit (BusinessDictionary, 2012). While the definition of profit is positive gain form business operation or investment after deducts all the expenses (InvestorWords, 2012).
Every not-for-profit organization has their mission statement. Mission statement describes of some combination of organization's intended or on-going activities and results that they hope to achieve (Leonard, 2006). For example, the mission of University Tunku Abdul Rahman is 'to be a leading university offering education of highest standard in all significant fields aimed at fully developing the individual and better serving the nation' and 'committed to the advancement of knowledge' (Universiti Tunku Abdul Rahman, 2011). They need to generate some profit in order to achieve the mission. UTAR need capital to build the building to provide a good learning environment and they need the facilities and equipment for students. Moreover, they also need to pay for the utilities and improve or maintain the facilities and equipment. In brief, not-for-profit organization needs to generate some money in order to continue operating. It is just that in not-for-profit organization, making profit for the organization is not the main aim.
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Besides, not-profit organization did not have many full-time volunteer, in order to reach the mission they need to hire some employees. To reach the mission, they also need to hire expertise employee for the job. The mission of Labour Union is to represent their membership in negotiating higher wages elimination of discrimination in the workplace. They need to hire the employees who are expert in law to reach the mission. In the competitive job market, employees require the salaries that are unanimous to their level of their expertise. Profit needed in not-for-profit organization to sustain the monthly salaries to hire employees.
Not-for profit organization does not have owners, it is operated by board of directors. They have board of directors meetings discuss and to approve activities. They can generate the profit by having a fund raising, donation from public and fees paid by others.
In conclusion, a not-for profit organization is established to serve a number of different charitable and non-charitable purpose. A not-for profit organization needs generate profit to defines the organization's mission. The purpose of getting profit is to provide something value to general population. They need financial support to run the organization and use to pay the employee, utilities and operation cost. Making profit is not their main focus but to sustain the operation of their organization.
The Importance of Conceptual Framework for Accounting
Conceptual framework of accounting is very important because it facilitates harmonization and helps in convergence of accounting regulations. It can help to improve efficiency by sustaining common set of assumptions and regulations with the convergence of accounting standard (Gore, 2007). Besides, Conceptual framework also helps to remove inconsistency. For example, it helps to prevent the arguments of those basic concepts such as what is an asset, what is liability and so forth (Williamson, 2002). Hence, the convergence of accounting regulations can help to obtain consistent accounting statements. With the convergence of accounting standard, it enhances the communication between the standard setters and its users (Australian Accounting Standard Board, 2001). Users can communicate with standard setters efficiently by using conceptual framework because of the same terminology used in the accounting standards. Therefore, it can help in discussing accounting issues (Williamson, 2002).
Also, conceptual framework is important because it helps the users or preparers of financial reports to understand as well as interpret the information of financial statements deeply and discover its weaknesses. Users use conceptual framework as a reference to understand accounting statements as conceptual framework contains rules and regulations of new principles are prepared. For example, with the help of conceptual framework, users will be able to know the accounting concept as well as the regulations of accounting. Besides, auditors also use conceptual framework as a guide to check errors as well as students use conceptual framework to study accounting (Williamson, 2002). For instance, auditor will follow the accounting rules under conceptual framework to reexamine accounting statement. With conceptual framework, people can further understand financial statements easily.
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Moreover, conceptual framework also acts as a guideline or principle for development of future practice of financial accounting standards. Conceptual framework carries out analysis, interpretation and adjustment of accounting concepts for future standards. Besides, conceptual framework consists of existing basic concepts which may help in the development of future standards. Accounting standard setters can refer to the conceptual framework which consists of basic concepts, principles of accounting to set the new standard. This will help them to save time without creating premises and regulation of accounting. Hence, conceptual framework acts as the guideline for the development of future accounting standards (Accounting Standard Board of Japan, 2006).
Furthermore, conceptual framework helps to deal with transaction of accounting condition and events when there is no accounting standard yet. People can deal with transaction of accounting by setting conceptual framework as the guideline. This can help to solve similar transactions or other accounting issues if people take conceptual framework as a reference. This is because conceptual framework contains basic concepts. So, preparers can deal with transaction and condition of accounting based on the basic concept such as measurement of asset, liability and so forth. With this, preparers are able to make sure the ways they deal with transactions and conditions are applicable as well as effective.
Conceptual framework also helps to enhance to credibility of financial reporting (Williamson, 2002). This is because conceptual framework provides directions to create financial statements and financial reports. It is more reliable if the preparers use conceptual framework to prepare financial statements because conceptual framework is consistent. Hence, this will help to reduce errors and increase the confidence of investors.
Conceptual framework also guide the management of an organization when they are doing subjective judgment when the preparation of financial statement. The management of an organization tends to follow their own alternatives to prepare account if there is no conceptual framework. With conceptual framework, the management of the organization is forced to follow the conceptual framework to prepare account. This will help to increase the consistency and lead to higher comparability of other organizations.
The Advantages and Disadvantages of Regulating Accounting Information through Accounting Standard
With the regulation of accounting information, the level of separation between the owners and managers has been increased. Mangers or management authorities will responsibility with the operation of the company, so that owners do not require being skilful in that particular industry. The owners can focus on investing in other industries by giving the responsibility of the companies to the experts (James, 2012). At the same time, regulation of the accounting information through accounting standard has brought out some advantages and disadvantages.
One of the advantages from regulating accounting information through accounting standard is the investment risk can be reduced. With the regulation accounting information through accounting standard, accounting experts can interpret and compare the financial information easily which will help the investors and companies to reduce the investment risk when they are referring to the financial report (Murphy, 2010).
Besides, the regulating accounting information through accounting standards can help the multinational companies to create strong economic benefits. The accounting standard could help multinational companies to earn larger profits by involving in stocks exchange around the world when they adopted the accounting standards which cause them to be eligible for listing (Bolt-Lee, 2009). This will help the companies in involving expanding business with increasing profits.
Furthermore, the regulating of the accounting information through accounting standard also could help the multinational companies to improve the reliability of financial statement. This will ease the experts or accountants to accomplish the financial report with the corrective guidelines which can prevent the companies from making financial errors. The reliability of the financial statement also can enhance the transparency in order to strengthen investors' confidence as well as increase the market position of the adopters.
Accounting information through accounting standard is also important to act as analysing tool. With the standardised information, those multinational companies able to analyse their companies and competitors' performance through accounting reports (Shanker). With this, they can run a business, plan ahead and make changes when the companies business is not run as expected (Shanker). With the clear accounting information also help the companies to make wise decision in expanding businesses or investments.
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Everything has its pro and con, this same goes to the regulation of financial information. The disadvantage of the financial information through accounting standard is the standard will cause burden to the small business. This is because the accounting standard cost is high for the small business due to the integration of accounting standard. These costs are the encumbrance that could harm the small companies from expanding or grow (Houston).
In addition, another disadvantage of the regulating information through accounting standard is inflexible framework. Due to different unstructured problems might occur, yet the accounting standard had been set with the fix framework, this will cause the accountants unable to combat with the unstructured problem effectively and efficiently. Thus, the accountants only able to set the unique experiences as a new guideline of the standard after the problems have been solved (McIntosh).
In short, the regulating of the accounting information through accounting standard will reduce investment risks, create strong economic benefits, improving reliability of financial statement and act as analysing tools. The flip side of the regulating accounting information is it will burden to the small business and inflexible framework. From the overall, the regulating of accounting information through accounting standard is providing more advantages than disadvantage.
The Merit and Shortcomings of the Historical Cost Accounting Concept
The issue of historical cost accounting concept versus current cost accounting concept is a hot topic that has been debated over years. Both of these accounting concepts bring advantages and disadvantages.
There are several merits of historical cost accounting concept can be listed. First, the merit of using historical cost accounting concept is that it able to help the managers in making economic decisions (Bakar & Said, 2007). Manager could foresee future operational costs based on past data. Historical cost data enables managers to analyze based on past data and satisfice for good enough solution as they are limited in their ability to analyze all possible alternatives. Historical cost is used because it tells the cost of a thing and how much has been earned in the decision maker's environment (Bakar & Said, 2007).
Next, the benefit of using historical cost is that it avoids managers from manipulating the figures to be recorded (Bakar & Said, 2007). It is accountant's responsibilities to guard the integrity of the accounting data against internal modifications (Thompson, 2007). In historical cost accounting concept, the data is recorded based on actual transactions with supported by evidence such as invoices and receipts. Hence, every transaction is recorded objectively and at acquisition price.
Furthermore, historical cost is useful for control purposes as the stewardship of management is seems involved in the objective of accounting (Bakar & Said, 2007). Historical cost is recorded based on actual transactions, thus the figures recorded are reliable. Managers can refer to the income statement to determine how effective a management has met its responsibilities and its level of performance (Bakar & Said, 2007).
However, historical cost also has several limitations. Historical cost which mainly consider the acquisition cost of an asset ignores the fact that managers are not only interested in the cost allocations and how much have been earned. A manager also interested in increases and decreases of the value of their investments in current market (Bakar & Said, 2007). Hence, it provides insufficient information for the evaluation of business decision.
Furthermore, historical cost is sometimes misleading as it flaws in times of inflation (Thompson, 2007). The validity of historical cost failed to guarantee the quality of justice when the transaction-oriented accountants were more interested in checking past data rather than current physical reality (Bakar & Said, 2007). In addition, the effect of inflation may not be the same for every organization and causing historical cost concept mislead when it is used to compare corporate performance (Thompson, 2007).
Undeniably, current cost accounting concept carries advantage too. Current cost able to present better reality of economic transactions which provide sufficient information for economic decision making as compared to historical cost (Bakar & Said, 2007). Current cost accounting concept able to adapt to rapid changing business environment, hence it is believed that it reflects a better measure of efficiency of a company. Although current cost provides more relevant information but the market value of financial statement may be less reliable as it does not rely on evidences (Bakar & Said, 2007).
Besides, by using current cost accounting will open the door for others to manipulate the figures as it is not based on actual transactions (Thompson, 2007). Current cost accounting will be too subjective as it would be recorded depends on individual point of view and subject to different people (Bakar & Said, 2007).
In addition, current cost accounting is found that it is only useful for making short term portfolio decisions (Bakar & Said, 2007). Historical data seems able to drive the force behind long term return rather than current cost accounting. This is because historical data provide reliable evidence for the change in dividends from the past until current timeline (Bakar & Said, 2007).
As a conclusion, it is seems that historical cost accounting concept are more practical in reality. Accounting firm still continues using the flawed historical cost concept as there is no other better replacement (Thompson, 2007).