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This assignment gives a great opportunity for us to learn more about UBAF1013 Financial Accounting Framework I. Since it is a self-learning basis, we are going to search our own learning materials, analyse them and lastly make judgements based on our discussion.
We appreciate doing this assignment and we claim to complete it with our very best. Beside acquiring the knowledge regarding the world of accounting, we believe that we will once again be lead to a higher level of responsibility, tolerance, rationale, and teamwork spirit.
By the end of this assignment, we hope that we could enhance our mastery of the subjects. More importantly, we could study how important for us to study the subjects, rather than merely defining it as a "debit and credit" subject.
Q1) Not-for-profit organization need to generate profit
Different from profit organizations that generally aim to maximize their profits, not-for-profit organizations (also called non-profit organizations) exist mainly to provide services for their members and the publics. These services included low-cost educations, affordable healthcare services, poverty saving, low-interest financing, human rights protection, environments conservation and the list goes on. Non-profit organizations are important in promoting social welfare.
Do non-profit organizations generate profit? Many have questioned how these organizations survive without financial supports. Like most of the profit organizations, they do need funds to maintain their daily operations by generating revenues, instead of profits. One should not be confuse "revenue" and "profit". Revenue is the money generated by organizations over a specific period, while profit is the money generated in excess of operating costs and after deduction of retained earnings. Profit is distributed to shareholders as compensations while revenue is not necessarily distributed.
In a non-profit organization, the surplus revenue generated must be retained for its self-preservation, expansions, and plans, rather than distributed as dividends and personal profits. There are various ways used by non-profit organizations in different sizes, purposes, and services provided to generate their revenue. Some organizes charity fund-raising and some rents out parts of their properties. Many non-profit organizations also seek for tax exemptions including sales taxes and properties taxes from the governments, in order to lower administrative costs while pursuing respective non-profit goals. The revenue generated is then used mainly to finance their goals while other parts of the funds are used to cover the operating costs, such as compensations of employees. Said compensations of employees, it is difficult for today's organizations to have huge volunteer base. It is because people today want to be paid in accordance with their professions in the competitive job market.
UNICEF, Invisible Hands, Earth Hours, World Wide Fund for Nature (WWF), World Vision, and Universiti Tunku Abdul Rahman (UTAR) are examples of non-profit organization. For example, UTAR mainly offers low-cost high level educations. It is a large organization with 4 main campuses and thousands of students. In raising the revenue, UTAR collects affordable fees from students and attracts potential investors by keeping its goodwill. After deducting huge operating expenses such as utilities, securities, repairs, and employees' compensations, the remaining revenue is used for campus expansions and facility upgrades.
Referring back to the question, the term "profit" and "revenue" should not be confused as they lead to different meanings. In conclusion, non-profit organization needs to generate revenue, instead of profit. No organization is believed to be able to survive without any financial supports.
Q2) Importance of the conceptual framework for accounting
Conceptual framework of accounting is interrelated objectives and fundamentals that are needed to perform a consistent accounting standard. It is a coherent system that acts as a guideline to set up the accounting standard which is formulated from the framework.
Conceptual framework is important for the preparation of accounting. Firstly, harmonization of preparation of financial reporting can be promoted by complying with framework. For example, organizations that are guided by one consistent framework would find it easier to compare their financial statements with other companies complying with the same framework. Therefore, the conceptual framework benefits one organization by providing more comparative financial information and thus one could use the financial information to analyze the strengths and weaknesses especially when forming strategies.
Secondly, process of decision making and implementation by using conceptual framework as a foundation. For example, in the process of FASB in formulating their implementation, conceptual framework acts as the guideline. It provided discipline of the financial statement which is more consistent thus modified accounting rules is provided with the detailed rationale. FASB may debate the adoption of an accounting standard change, by referring to the conceptual framework the reasoning behind can be justified.
Next, efficiencies and better communications are brought by implementing conceptual framework. The discussion about the accounting standard is brought to a higher level. For example, you don't' have to start from zero for every time when you assess the accounting issue, you can debate about the asset, liability in the report. You can easily define the concept with a better understanding.
Also, conceptual framework facilitates the convergence of global accounting standard. Recently, there is a strong push towards convergence of global accounting standards by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). A standardized conceptual framework plays a role in aligning the reporting method into a consistent way.
Besides that, conceptual framework provides a more understandable platform for financial reports users which differ among cultures and backgrounds. From global perspective, it solves the problem that users come from different backgrounds by applying commonly accepted guidelines and rules. For instance, common international language set by the conceptual framework can help enhance the understandability of the financial information, and in turn, potentially enhance the international investment activities.
In addition, conceptual framework is also important to assist user either from external or internal for easily to interpret the information in the financial statement. The internal user is the manager and non managerial employee, and external user including investor, supplier and government agencies. Manager can easily interpret the information thus assist them in making future planning. It also provides the guide and regulator for manager to make judgement. For external user like investor, conceptual framework that implemented in the accounting standard will increase their confident to invest to the particular company. For example, the reliability and understandability of the financial report.
In conclusion, conceptual framework is important from various point of view Besides decision makings, it also contributes to communication, international standard setting thus the understanding of existing and prospective accounting standard.
Q3) How modern day bookkeeping and the double entry system evolved and their importance
Bookkeeping is the activity of keeping records of the financial affairs of a business. The use of the bookkeeping can date back to 4000 B.C. during that time, time token were used. Until 1400's, a book on practice of bookkeeping was written by Luca Pacioli which titled "Summe de Arithmetic, Geometria, Proportioni et Proportonality." This book is the groundwork of the modern bookkeeping. Before the use of the computer, all this bookkeeping process needs to be done by bookkeeper. All the business transaction needs to be record manually into a journal. They are then required to post the entire journal to the company's general ledger and subsidiary ledger account. This will take longer time and may occur many errors. Bookkeeping is then evolved to computerised bookkeeping system when the wide use of computer. Nowadays, with the help of computer, the process of bookkeeping can be done by much efficiently and effectively. Assist of the computer not only can save many whereas can reduce the error since the journal can be posted electronically and calculated automatically (Lisiecki, 2010).
Double entry system is the transaction that record in at least 2 accounts in term of credit and debit. The first of use of double entry system was by merchants in medieval Venice. In the late 1400's, the procedure for the double entry system was documented by Luca Pacioli as part of Summa work. A significant portion of the accounting cycle was described in Summa work. Double entry system is then spread throughout and became foundation of modern accounting. Double entry system record on 2 side is to ensure that the accounting equation in balance so that "Assets = Liabilities + Owner's Equity". However, modern financial instruments have made double entry system more complicated although the practice of double entry system remains constant. Moreover, corruption in major accounting agencies realised that the fundamentals of accounting can easily be distorted without careful oversight (Yargo, 2011).
Importance of Bookkeeping
Bookkeeping is very important especially when a company want to prepare for taxing purpose (123bookkeeping, 2009). Every year, business must include all their expenses, profit or loss and submit the information to taxing authority. With a good bookkeeping, one company does not need rush to find all the bills and it can prepare required information easily. In case the auditor from the government wants to audit the company's finance, the company can provide all the records to verify all the transactions.
Besides that, bookkeeping is important for the preparation of financial statements (Importance of Bookkeeping, 2012). Most of the time, accountants need to extract all the recording done by the bookkeeper before preparing the Trading and Profit and Loss account (income statement) and position statement (balance sheet). Without a good and accurate bookkeeping system, accountants will face difficulties in preparing the financial statements.
Importance of Double Entry System
Double entry system plays an important role in improving the accuracy of the financial reports (Account-Audit-Finance, 2010). Basically, each transaction is recorded as debit amount with a corresponding credit amount. If the total debits recorded does not equal to the total credits, this indicates that something is wrong in the recording (Simplestudies, 2012). With the double entry system, the accountant is able to check back the records and makes correction of it. Hence, through this method it can improve the accuracy of the financial reporting.
Secondly, double entry bookkeeping system contains detailed record of all transactions and it could help users to make decisions. For example, expenses is one of the elements which can be found in the double entry. Through the expenses account, manager can easily control the cost of the company (Account-Audit-Finance, 2010). For example, if a manager found out that the expenses for utilities from the expenses Account are too high, managers may encourage the employees to save the resources.
Q4) Advanrages and disadvantages of regulating accounting information through accounting standards
Accounting Standard standardizes the financial reporting and help users to assess to financial information easier, especially in global perspective. All public listed businesses have to record all their financial information in their financial statement after a specific accounting period. The Financial Accounting Standard Board (FASB) has set a series of accounting standards that enhance the recording of financial information. There are advantages and disadvantages of using these standards.
One of the advantages that the standard brings is understandability. The firms are required to follow the accounting standard published by FASB. The potential financial statement users, such as creditors, shareholders, investors and taxing agencies expect the firms to follow the standard when preparing the financial statements. These users depend on the assumption of the accounting standards when they are interpreting the result obtained from the financial statement. Even though different firms have different financial statements, the users could only use the same assumption to analyze different financial statements. Hence, user will only have to understand the assumption of the accounting standard instead of using different ways to study different financial statement.
Followed by the understandability, the comparability of financial information for similar businesses can be improved also. The effect is significant in global perspective. It is because countless financial experts around the world that seek to invest globally could benefit from the low comparing cost. This improved ease to interpret financial information could potentially enhance the overall investing activities around the world. On the other hand, multinational corporations could reduce their reporting cost without having to reconcile their financial information for multiples accounting standards.
Accounting standard also serves as guidance to accountants when they are recording the financial statement. There are several issues involved in financial reporting, such as new accounting transactions due to technology and changes in pension plans. Accountants may refer to the accounting standard when these issues arise in order to determine the ways of recording the event. The FASB concerns about the needs of financial users and feedback from companies when they creating the accounting standard.
However, the accounting standards published by FASB face a disadvantage whereby it involves the inflexible framework that the accountant has to bear. Every company around the world is different in terms of experiences even though they are from the same industries. Some companies may find it hard to comply and cope with due to the companies experiences. Hence, accountants have to fit the company's unique experience with the guidelines provided by the accounting standard, in turns, results in inflexibility.
Another disadvantage in applying the accounting standard is the additional cost for firms complying with the account standard. When a new accounting standard is published by FASB, a company has to consider the requirement of the standard, such as what actions needed to be taken what is the cost in order to apply the new accounting standard. At the end, company may have to design a new procedure, which needs large financial investment such as system upgrade, employee training and new labor cost.
Q5) The merit and shortcomings of the historical cost accounting concept
The debated about issue of "historical cost accounting versus current value (fair value ) accounting" seem like a never-ending story. Actually, the historical cost principle requires that all assets and liabilities must be recorded at their acquisition also means as the cost they purchased. In the others hand, the current value principle requires that all the assets and liabilities must be recorded accordingly to their market or current value.
Historical cost accounting principle
The historical cost accounting principles can be defined as the aggregate price paid by the firm to acquire ownership of an asset, including all payments necessary to obtain the asset in the location and condition required for it to provide services in the production or other operations of the firm. Business firms commonly use historical cost principle only in the situation where the prices are stable.
There are some advantages of historical cost principles in the accounting model. One of the advantages of applied historical cost concept that historical cost is relevant in making economic decisions. This is because historical cost can affects the evaluation and selection in the process of making economic decisions. Besides, managers need to collect the information of quality of their past decisions to determine which decision rule to use. Historical cost also is related to the past decisions.
Secondly, historical cost is less subject to manipulation. Historical cost principle is easier to be manipulated because it is based on actual cost of the transactions. The managers only have to record all their assets and liabilities at their acquisition prices. Therefore, historical cost is verifiable. In shorts, applying historical cost principle avoids the risk of manipulation figures by the managers.
However, historical cost cannot escape from some shortcomings that came from the proponents of current cost accounting principle. One of the disadvantages is that historical cost accounting could be misleading. There are cases in which some reporting companies use this accounting figure to misguide the investors and creditors.
Besides that, the transaction-oriented accountants are more likely to check documents for historical cost rather than current physical reality and valuation of the entity. This means that financial information cannot be guaranteed of the quality and honesty.
Current value concept
On the other hand, current value concept can be defined as the prices hat must be paid for an assets or its use at the date of the balance sheet or the date of the use or sale if that asset is not already owned.
There are several advantages and disadvantages of current value concept. One of the merit of current value concept is that it provides a better measure of efficiency. The efficiency of the company can be measured by the current value principle. This is because current value principle provides a separation of profit in to the part which arises from holding asset before they are sold. This reflects the result of asset management decisions and the impact of the environment on firm not reflected in transactions. In addition, separation reporting of holding gains also will enable users of financial statement to make a more accurate assessment of the company's operating performance.
Moreover, the current value accounting is relevant for decision making process also. The market value of current cost accounting better presents the economic reality of transactions and therefore tends to provide more useful and more relevant information of financial reporting.
However, the current value accounting brings some shortcomings to the accounting model and financial reporting. One of the shortcomings of the current value is its openness to subjectivity. The current value used is not based on actual transactions. It is hard to determine the exact current value. So, the managers might set the range of the current value, which can be said as the determination of current value is under the discretion of managers.
Besides that, the current value relevant only for short-term decision also. Share returns in the long run are more closely associated with historical data than current value data. There was no convincing evidence that individual current value adjustment play a significant part in the dividend decisions.