Distinction between for-profit businesses and not-for-profit entities

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Preassignment DQ #1

What is the defining distinction between for-profit businesses and not-for-profit entities, including governments? What are the implications of this distinction for financial reporting?

The reason for existence is the most defining distinction between for-profit businesses and not-for-profit entities. Revenue driven organizations are established to generate income for entrepreneurs and their workers, while nonprofits are established to serve a compassionate or ecological need. Nonprofit organizations channel the greater part of their income into projects and services aimed at meeting peoples unmet or under-addressed issues like sustenance, water, education, shelter, or different issues such as endangered species and the environment. For-profit companies offer goods and services that have value in commerce, choosing to circulate profits between proprietors, workers, shareholders and the business itself.

This is evident in the spending patterns of for-profit and not-for-profit entities. Revenue driven organizations depend on earned income and credit arrangements with banks and suppliers to finance their operations. Nonprofits, depend almost wholly on grants and donations from well-wishers, government bodies and organizations. Their source of income determines, how the company can use its money. Since nonprofit income is from donors, they are expected to utilize their resources in a manner that maximizes advantages to their beneficiaries.

Proprietors and managers require financial statements to make critical business choices that influence its continued operations. Financial analysis is then performed on these statements to furnish management with a more definite comprehension of the figures. These financial statements are also used as a major aspect of management's annual report to the shareholders.

Monetary organizations like banks and other lending institutions use them to decide whether to grant a company with working capital or widen debt securities such as debentures or long-term bank loans to back expansion and other significant expenditures.

Preassignment DQ #2

Why is the budget a far more important document for both governments and not-for-profits than for businesses?

Government and not-for-profit spending plans are more vital than those for businesses because they express public policy and often convey the power of the law, keeping the authority from spending outside their budgetary authority. This is reflected in government budgetary reports comparing budgeted and actual amounts.

Governments and not-for-profits are ruled by their financial plans, not by the commercial aspects. Revenues and expenses are managed through the budgetary procedure. Government’s incomes may be controlled by legislature, so they aren’t subject to rivalry like in for-profit. Not-for-profit driven incomes aren’t created by legal mandate, but are acquired from contributions, duty, tuition, or user charges, unlike the sales of a business.

Government and not-for-profit budgets are very imperative because they are the climax of the political process and contains most of the organization’s vital choices. The budget determines which constituents give to the entity and which receive, which activities are supported and which are assessed. The power of law backs government budgets and authorities use as a manual to supervise spending. The budget is used as a control gadget and supplements the bookkeeping and reporting framework.

State laws oblige executives of state offices and of local legislative units to acquire the appropriate legislative body’s official approbation of all arrangements to raise revenues and make expenditures. It is regular for state agencies to be given the obligation regarding observing the monetary plans and operations of local governmental units.

It's vital to recollect that a financial plan, when embraced by determined in state laws, is binding upon the administration.

Preassignment DQ #3

Why has it proven especially difficult to establish accounting principles that satisfy all three elements of GASB's first objective of financial reporting in a single statement of revenue and expenditures or a balance sheet?

The GASB is the independent, not-for-profit organization formed to establish and improve financial accounting and reporting standards for state and local governments. Its seven members are drawn from the Board's diverse constituency, including preparers and auditors of government financial statements, users of those statements and members of the academic community. It has been difficult to establish accounting principle that satisfy all three elements in a ingle financial statement because some of those objectives reaffirm the importance of information that governments already include in their annual reports. Other objectives point to a need for new information. For this reason, this Statement requires governments to retain some of the information they currently report, but also requires them to reach beyond the familiar to new and different information. This Statement will result in reports that accomplish many of the objectives we emphasized in that concepts Statement. With this in mind it may not be easy to acquire all financial statements required.

In current annual reports, fund information is reported in the aggregate by fund type, which often makes it difficult for users to assess accountability. It might not be easy to obtain relevant financial reports for all the balance sheets. However, it would be easy if this was possible.

Preassignment DQ #4

Upon examining the balance sheet of a large city, you notice that the total assets of the general fund far exceed those of the combined total of the city's ten separate special revenue funds. Moreover, you observe that there are no funds for public safety, sanitation, health and welfare, and general administration - all important functions of the government. Why do you suppose the city hasn't attempted to "even out" the assets in the funds? Why does it not maintain funds for each of its major functional areas?

In state governments, funds are allocated and set aside for a special purpose, It must be used for that capacity and need to be tracked independently. The general fund is much large, because it is money that not only comes from several sources, but also is used for many purposes. They may not list public safety, sanitation, health and welfare, and general administration because it comes from the general fund and does not need to be tracked or accounted for separately. Evening out all the assets in the funds generally is not good because you are giving even values to funds that were not specifically tracked separately and would not equal each other in reality.

Rather, they make finances mostly to advance control and responsibility over limited assets. The general funds of the city is presumably bigger than the special revenue funds put together because the majority of the city's advantages are unrestricted and the unlimited resources can be collected in a single fund. Evening out the funds may also prove detrimental to other secotors. Other sectors may require more funds due to several reasons. If funds were to be distributed equally some areas would lag behind in carrying out its responsibilities. This would also mean those that do not require a lot of funds would have surplus money in their accounts yet others have insufficient funds.

Preassignment DQ #5

The balance sheets of both enterprise funds and internal service funds report capital assets and long-term debt. What does that tell you about the funds' measurement focus and basis of accounting? Explain.

The balance sheets of both enterprise funds and internal service funds report long lived assets and long term debt means that the funds are usually fully accrued.

Most of governmental financial information has been kept up and reported in the financial statements on the altered accrual basis of accounting or the accrual basis for commercial activities. The recently enacted GASB Statement 34 creates extra reporting statements that indicate a major change in the focus and content of legislative financial statements. Gathering and reporting extra financial information needed by the government statements add to the difficulty of financial reporting activities and have critical ramifications for the traditional focus and basis of bookkeeping used in governmental financial statements.

The new government financial statements and are made using the economic resources measurement focus and the accrual basis of accounting. Subsequently, the incomes are seen in the accounting period in which they are earned and get to be quantifiable without regard to availability, and cost are perceived during the time acquired, if quantifiable.

This means that governmental fund financial statements will continue to be prepared using the current financial resources measurement focus and the altered accrual basis of accounting. Revenues are recognized in the period which they were available and quantifiable, and expenditures are recognized in the period in which the fund liability is incurred, if measurable, except for interest that has not matures on general long-term debt, which should be recognized when due. Proprietary fund financial statements are still being calculated by use of the economic asset measurement focus and the accrual basis of accounting.