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Furthermore, profit is a financial benefit that is realized when the amount of expenses, cost of operating, and taxes can be covered by the total amount of money are made from a business activity in order to sustain the activity in their organization. So that any funds they can make and goes to the business's owners, who might or might not decide to spend the profit on the business as well.
Profit can be calculated as: Profit = Revenue - Expenses
Hence, any money earned from not-for-profit organization, they must retain, and to use the money for its own expenses, operations, and programs. Usually not-for-profit organization do not gain any profit in their operations. Because not-for-profit organization need to make sufficient funds in order to cover all their operating expenses. So most of the time they are operating their not-for-profit organization in a break-even (Revenue = Expenses) condition. For instance, Old folks home got the money from donation by charity. They use all the funds to cover their expenses and take care for old man or woman who are abandoned.
On the other hands, non-for-profit organization needs to generate profit although the stockholders, company owner or trustees in the not-for-profit organization does not benefit financially when money the organization made can be covered and exceeded the operating expenses. Non-for-profit organization needs to generate profit, because when their operating expenses can be covered by revenue they earned and it profits will be used by them for establishing or maintaining to serve a number of different charitable and non-charitable purposes to the populace. In order to raise their funds for operating their activities, non-for-profit organization will organize some related to their mission activities. To avoid having to pay taxes on any profits it creates, they must make money on activities which related to non-profit status.
For instance, there was a nonprofit organization which is called Care for Old Age and they are collecting old clothing, taking care, cleaning to old man or woman in need. They are being generated their income by organizing charity food fair and fundraisers. Non-for-profit organization could use the income they generated from these activities to pay their expenses and employee wages. So they would not have to pay any taxes on their profit, because their activities are related to their mission which taking care old man or woman in need.
Last but not least, in order to maintain their activities, not-for-profit organization wills always minimizes their operating expenses in order to raise their profit because they need to operate their activities in the not-for-profit organization. Therefore, populace can be acquired more benefit by them. For example, Tunku Abdul Rahman University earned the revenue from students. Hence, the money earned from students can be used by UTAR in order to buy the facilities in the campus such as equipment or expand their building. As the result, students can be educated in a good environment. Therefore, non-for-profit organization needs to generate profit.
In the conclusion, not-for-profit organization needs to generate profits in order to operate their activities for populace and cover their operating expenses and they need also to use the profits for supporting their charitable or non-charitable programs.
Conceptual framework for accounting is a constitution, a coherent system of inter-related objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function and limits of financial accounting and financial reporting. ( Christopher J Pyke, 1999). With the fundamental concepts, it acts as a guide in developing accounting and reporting standards by providing a common foundation on which to consider merits of alternatives.
Conceptual framework deals with fundamental financial reporting issues:
Objectives of financial statements,
the qualitative characteristics that make accounting information useful (e.g: understandability, relevance, reliability, comparability, timeliness and completeness)
Basic elements of financial statements (e.g: assets, liabilities, equity, income, and expenses)
Concepts for recognizing and measuring these elements in the financial statements. The basis measurements available are historical cost, current replacement cost, current market value, and net realizable value.
The importance of conceptual framework
There are many advantages to practice conceptual framework of accounting. First of all, it guides the FASB in establishing accounting standards. Thus, standard would tend to be more consistent with one another and this will enhance credibility of accounting information. Besides, it acts as guidance to the standard setting body to be in better position in choosing the alternatives methods available. It also provides a frame of reference for resolving accounting questions in the absence of specific declare standards. (Vincent, 2012).
Furthermore, it improved communication among accountants and standard setting bodies and its elements. Conceptual framework determines the judgment in preparing financial statements by prescribing the nature, functions and limits of financial accounting and reporting. It also enhances comparability of financial statements by decreasing the number of alternative accounting methods. (Vincent, 2012).
Besides, reporting requirement will be more consistent and logical because they will stem from an orderly set of concepts and the need for specific accounting standards will be reduced. The setting requirement will be more economical because issues should not be re-debated from different viewpoints. It enhances the credibility of financial reporting and in turn helps to reduce accounting's vulnerability to political pressure. ( Duncan Williamson, 2002)
Conceptual framework increases users confident and understanding of financial reporting. It provides a measure which general and specific accounting can be tested in an objective sense, a basis of reason, direction and a basis of appeal in the resolution of disputes. Lastly, it provides a consistence approach in the making of decisions concerning the choice of accounting practices, methods and in assisting the setting of accounting standards.
Bookkeeping is a systematic recording financial transaction which included sales, purchases, income, receipt and payment by an individual or organization. There are two common types of bookkeeping: single-entry and double entry system. Single entry is a simple accounting system in which the transactions are recorded only once and do not balance. (Lahle Wolfe, n.d.).Transactions in double entry are recorded in both debit and credit. Since a debit in one account will be offset by a credit in another account, the sum of all debits must be exactly equal to the sum of all credits. (investor.com, n.d.)
Frater Luca Pacioli is the Father of modern bookkeeping. He was born in 1445 in Tuscany, Italy. In 1494, he wrote a book title "Everything About Arithmetic, Geometry and Proportion". The book described in detail the standard accounting system used today. (Rhonda Campbell, n.d.). Pacioli was not the person invented the double entry bookkeeping but Benedetto Cotrugli. Cotrugli wrote "Of Trading and the Perfect Trader" in 1958, which briefly described many features of double entry. The work of double entry was first known published by Pacioli and credited to Cotrugli. (Orak Duke, n.d.).
At the beginning, bookkeeping was used to record barter transactions in term of narrative like dates and descriptions of trades made or terms for services rendered. When there were currencies available, trading systems and bookkeeping evolved. The bookkeeping was recorded in number. However, the information was still recorded in narrative style with all the number in single-entry bookkeeping. (investopedia, 2008).In 15th century, Pacioli introduced the double entry system which transactions are recorded in debit and credit entry. The historical origin of debit and credit transaction was start from single-entry bookkeeping. (Orak Duke, n.d.). For the current bookkeeping, it is used to record cash and credit transactions. The evolution from single entry to double entry system made bookkeeping more efficient. Bookkeeping has evolved through years from clay tablet to paper ledgers and now computerized system. (Steve Coff, n.d.). In the past, accountant used to record in the column ledger book and it was time consuming. Besides, it took lots of space to store data and there was always risk of fire, flood or other disasters. With the advancement of technology, the experts have invented the accounting software (eg: MYOB, UBS) to solve the problem. The evolution from traditional bookkeeping into accounting software has given impacts in recording the transactions. Accounting software enhances the speed of operation, saves cost and increases the accuracy and efficiency.
Bookkeeping is importance to sustaining and expanding a business. Without bookkeeping, owners do not know their company's financial condition. They may be facing financial crunches and missing opportunity to expand business. (Business-school, 2010). Besides, we need to prepare bookkeeping in order to finance a loan from bank. Banker need to know individual or organization's financial statement before giving the loan. With bookkeeping, organization will be easier to prepare taxes return. Good recordkeeping can avoid underpayment and overpayment of taxes. (Bookkeeping Outsourcing, 2011).
With double-entry system, company can check against bookkeeping error because the total amount of debit entries must equal to total amount of credit entries. Besides, company's financial position is clearly illustrated and can be accessed quickly. With both entries recorded (sales and purchases), companies can track who are their debtor and creditor easily. Each transaction is recorded twice in two separate columns, therefore omission of important data is never a problem. (Veronica Eyenga, n.d.).
The advantages of regulating accounting information are:
To make reports standard and comparable. Data entered in an accounting system is verifiable data, which is not in its opinions or wishes. Futhermore, accounting information is unbiased, and the objective is based on generally accepted accounting principles (GAAP). By appling the regulation to accounting information disclosure of listed companies can contribute the efficient allocation of social resources and promote market economy smoothly and orderly.
To prevent inappropriate activities. Regulation will prevent some people who engaging in inappropriate activities. Accounting is a social discipline and cannot be isolated from the broader implications of those who prepare accounting information and those who use it. For example, complex income tax legislation does not prevent tax evasion schemes being formulated by some accountants.
To protect the public. Hold corporations and public organizations responsible or their actions, with tougher laws in place to prevent fraud, the public will be safer against fraud. To allow that the accounting information aggregate risk transparency and it is to ensure that users can get more complete and clearer information on consistent basis.
The disadvantages of regulating accounting information are:
Lead to rigidity and stifle the creative accounting. Since each company can prepare its statements in its own manner, accounting statements will vary in style. With the regulations and standards would make the work routine and difficult to change which will lead to rigidity in practices. Thus, the quality of the accountants is restricted and it would also downside their flexibility. Moreover, they do not have opportunity on their creativity to preparing the reports, and if developed from political pressure they may influence professional thought.
Emerge information asymmetry. A significant problem that was central to the neo-empirical and positive accounting research is the need for regulation arising from information inadequacies leading to information asymmetries. Which mean this will create an imbalance of power in transactions which can sometimes cause the transactions to go deviation; it is a kind of market failure in the worst case. Besides, the existence of information asymmetries would lead to inequality of opportunity and returns among investors.
Historical cost accounting concept is the assets, liabilities, income and expenses of a company should be recorded as costs and prices at the time of the transactions. We only record the purchases cost of asset on this concept. However, fair value is the price at which supply and demand meet. It also called equilibrium price which is the price at a seller who is willing to sell and a buyer is willing to pay.
It has many advantages. Firstly, the cost is more reliable and verifiable because we record the original cost of the asset confirmed through an original invoice. The data is proved by sufficient evidences such as invoice and receipt because there is no scope for manipulated. Mangers can reduce the calculation mistake. Fair value is less reliable than the historical cost because it always changed by the market price such as depreciation. We cannot accurate to estimate the price.
Secondly, the information is free from any bias views because historical cost is based on actual transactions. This will help businesses to estimate their future costs based on past data in financial statements. Managers can calculate the approximate amount of cost by using past data. Without knowing the original cost, future projections are almost hampered. Fair value is hard for manager to forecast their operational cost because the price is always different.
Thirdly, historical cost is simple and easier understands by manager. It fits in perfectly with the cash flow statement because managers know what exactly has been paid or received. So, there is no doubt about the balance sheet amounts. They just simply record the original cost. They are no need to do any adjustment. Fair value is more complex. When the price of goods is depreciation or inflation, they need to readjust the cost.
However, it also has several disadvantages too. Firstly, the historical cost does not have any adjustment for inflation because it has already fixed. An asset purchased at the current point which may be more expensive in future due to inflation. It become unhelpful when inflation. It is state that the "financial accounting based on the original cost of an item ignoring inflationary increases". This means that it records an asset based on its actual value without any adjustments for inflation. Fair value will base on the current price. It will change its price due to inflation or depreciation.
Besides, historical cost does not show the actual value of company assets, it only focuses on cost allocations and not in the value of an asset. Managers ignore the acquisition costs and depreciation cost in the following years. The current value of an asset may be more than or less than its price but manager just record the original price. Fair value is based on current market value. Manger need to minus the depreciation cost from an asset to know its net value asset.
In conclusion, historical cost accounting concept and fair value also have their benefits and limitations. Therefore, managers need to use these two methods carefully. Managers cannot simply apply the method because they need to decide to use which one method based on the situation.
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