Not For Profit Organization Accounting Essay

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Not-for-profit organization as stated is an organization whose primary objective is to support an issue or matter of private interest or public concern for non-commercial purposes, without the thoughts of making monetary profit. Non-for-profit organizations are usually brought in by supporters or donors who are wealthy enough to fund their organization and are the building block to achieve the primary purpose of the organization. Hence, not-for-profit organization must pursue goals that benefit the community, rather than personal profit; they are not bound by the competition of business sector, serving only for specific purposes such as educational or charitable.

So, for a not-for-profit organization to generate profit is vital. This is very obvious in the current economy, where government programs are critically underfunded, while donors and other supporter have become more passive in their funding as the economy in the current state is devastating. The idea that non-for-profit organization should not earn profit which is often based on the misconception is misguided. From this point of view, organization would find it hard to support the salary or even wages of their employees.

Dissimilar for-profit organization, not-for-profit organization are funded by contracts and grants received from the governmental and other agencies, where by 100% of the funding under that agreement must be used for specific purposes where no profit is permitted and must be for educational and charitable purposes. Although quite common, this agreement involves on grant or specific contracts only, and should not be misleading with profits earned by the agency.

Compare to the Federal government, not-for-profit organization cannot simply print treasury securities or money when the money is tight. Most not-for-profit organizations are independent and self-sufficient, making no different from any other business corporation in that matter. For a not-for-profit organization, profits and cash flows are the main fuel that help keeps the organization running. Without those profits, organization would not operate in an effective and efficient way.

As in the world of not-for-profit organizations, profits are used to sustain, maintain and grow. It is very true that growth is as important to not-for-profit organizations as it is to for-profit organization. Growth expands the organization's ability to force more of those who promote from its programs and services. Growth also can enables the organization to spread out its programs and funding sources to minimize risk, for example, the risk that a particular program will be discontinued or the risk of losing an important source of funding.

Besides to mere survival, not-for-profit organization can gain profit in a few ways which include of enhancing existing programs where by most of the programs operate on low budgets. In addition, organization can build the capacity through provide quality programs and managing effectively by recruiting, hiring, and training the resources of organization. Furthermore, not-for-profit organization can also minimize the financial impact of any number of unexpected expenditures which are beyond the organization's control. Initiating and enhancing fund-raising efforts is also a necessity for any organization that relies on public funding to sustain its existence and not-for-profit organization should function as a self-funded line of credit to protect against the down-side of cyclical cash flow periods.

This is the number of reasons why it is important and crucial for not-for-profit organizations to generate profits. Just because the term "non-profit" is a tax status, it does not mean that not-for-profit organizations should not generate profits.

Question 2.

Firstly, conceptual framework for accounting play an important role to promote consociation of accounting regulation and standards by providing a basis for selecting an appropriate accounting treatment permitted.

For example in Australia, conceptual framework play an important role to develop a common knowledge of financial reporting for all people in business. With conformity with international accounting standards and concepts also have develop to the framework as it aligned with international framework. Besides that, basis for developing accounting standards is used in the conceptual framework.

In contrast, the conceptual framework also act as guide to provide structure to the process of creating future financial reporting standards and ensures that standards are based on fundamental principles which to consider advantages of alternatives. The standards which are sets by the IASB (International Accounting Standards Board). This is to avoid the happening of standards from becoming ad hoc and transitory. If without the accounting framework, accounting standards might be based on a solution that is persistent with a unified theory of accounting with the most adequate solution to a particular issue. The Conceptual Framework is a necessary element in the progress of principles-based accounting standards.

It could be argued that the lack of a conceptual framework led to a proliferation of 'rules-based' accounting systems whose main objective is that the treatment of all accounting transactions should be dealt with by detailed specific rules or requirements. Such a system is very prescriptive and inflexible, but has the attraction of financial statements being more comparable and consistent.

By contrast, the availability of a conceptual framework could lead to 'principles-based' system whereby accounting standards are developed from an agreed conceptual basis with specific objectives.

In addition, conceptual framework also important to assists the preparers of financial statement in the application of IFRS (International Financial Reporting Standards) in dealing with accounting transactions, events, conditions or circumstances which there is not yet an accounting standard.

Meanwhile, Conceptual framework is a guide and a regulator of subjective judgment made by management when preparing financial statement and others financial report. The Conceptual Framework assists users of financial reports in interpreting the information contained in financial statements prepared in conformity with financial accounting standards. The Conceptual Framework assists national standard setting bodies in developing national accounting standards.

Conceptual framework accounting is very important without it, standards were produced on a dangerous approach, often reacting to a corporate failure, rather than being proactive in determining best policy. Some standard setting bodies were biased in their composition (ie not fairly representative of all user groups) and this influenced the quality and direction of standards. Besides that, the same theoretical issues were revisited many times in successive standards - for example, does a transaction give rise to an asset (research and development expenditure) or liability (environmental provisions)?

Question 3

Bookkeeping is the records of daily business transactions. All the entries include sales and purchases are recorded in the book. Bookkeeping can be divided into two types of methods: Single Entry Bookkeeping and Double Entry Bookkeeping.

Single Entry Bookkeeping involves cash book that records petty cash, accounts payable and receivable.

Double Entry Bookkeeping involves the transactions that are recorded in debit and credit columns which have equal and opposite effects in two different accounts with the equation of assets = liabilities + equity.

Origin and Evolution of Bookkeeping

Bookkeeping in non-written form has been created in ancient times; people only used tokens to record their daily trading. As time passed, people desired for more sophisticated record keeping. Because of the argument in which this discovery was too complicated, bookkeeping was not being fully utilized. However, the bookkeeping system was then disseminated and being practiced in 1494 by Luca Pacioli.

Luca Pacioli was an Italian monk who had published a book named "SUMMA" which contained a section on book-keeping. In this book, Luca Pacioli wrote down a series of tools for bookkeeping such as journals and ledgers. In attribute to the presence of the principles of double entry bookkeeping, it formulated out the foundation of modern day bookkeeping and the double entry system. The system was then being further improved and used in the later century. Luca Pacioli is widely known as the father of modern bookkeeping.

The importance of modern day bookkeeping and double entry system evolved

The double entry bookkeeping system has the error-catching feature. It helps in detecting the errors by examining whether the entry is appropriate and trustable. For example, a company found an error in the statement (i.e. Cash); due to the double entry bookkeeping inherent matching principles, there will be another account (i.e. Account Receivable) needed to be adjusted. At the end, there is higher chance to find out the errors since it is more than one account affected by the wrong entry.

Previously, bookkeeping system used to evaluate businessmen own financial position. During that time, it was sufficient to understand own finances through records. However, the company stakeholders nowadays not only have to understand financial information in own company, but also have to compare them with their competitors. They normally need income statement (i.e. Trading and Profit and Loss Account) and position statement (i.e. Balance Sheet) to make judgement. This financial information which used for cost planning, budgeting and forecasting is sourced from bookkeeping as they preparing the statement.

In today's world, all transactions such as invoices, sales and purchase orders are formed in paperwork. As the size and the complexity of the company increases, the more complicated in the transactions are. Limited capacity of human being and separation of duties in work may lead to errors occurred. This shows that the written records supported by documentary evidence and standardization are important. Therefore, the company needs strong internal auditing practices in order to prevent errors in statements. Double entry book-keeping which record transaction logically and inherent error checking features is needed well by the company.

The world we live has changes significantly, but the double entry bookkeeping is still useful in today's business environment. There was an allowance for flexibility in term of valuation and new creation of non-traditional account (i.e. wages payable and marketable securities); the bookkeeping system is a subset of the larger information system. In other word, it gives greater flexibility in case any market changes.

Question 4

Using accounting standards could results in a more easily understandable financial statements. Processes required for business to follow are stated in the accounting standards published by the FASB. When creating financial statements, companies are expected by the financial statement users to follow the published accounting standards. While interpreting the results reported, these users rely on the assumptions set forth in the accounting standards. The users will interpret the financial statements of different companies by using the same assumptions. Once these assumptions can be understood by the users, reading any financial statements will be hassle free.

Secondly, providing guidance to the accountants are another advantages of using accounting standards. The respective accountant may take reference on published accounting standard in order to determine the way to record the event whenever financial reporting issues arises. Issues that includes new accounting transactions arising from technology, for example internet sales, or maybe new performance incorporated changes in pension plans by the company. When creating accounting standards, FASB incorporates not only the needs of financial statement users but together with the company's feedback as well. This process is to make sure that the accountant can be rest assured, as the guidance provided through the accounting standard passed the rigorous process of ensuring that it achieve everyone's needs.

One of the disadvantages of using accounting standards concerns with accountants complying the inflexible framework. Each company encounters different problems and experiences. Each accountants must make sure that they could be able to fit the company's unique experiences into the guidelines of the published accounting standards.

Cost for the company to comply with the standard should take into consideration when it comes to using accounting standards, which leads to another disadvantages of accounting standards. The company need to consider the requirement of the new accounting standards and what actions the company should take to realize the standard and what the cost will be. In many situations, the company should design new measures that require a large financial investment. It includes the employee labours costs, system upgrades and employee training.

Question 5.

The main merit of historical cost accounting concept is that historical cost is easy to determine and can be verified. It also is a cheaper way of valuation. Thus, it no need a big number of estimation for accountants to record the data and also easier to inspect subsequently. Besides, historical cost is based on the actual and not merely possible. The value of the assets that recorded on the financial position is based on the cost of acquisition price. For this reason, they are deliberate and reported objectively. Based on the verifiable, it can minimize the risk of manipulation of figures by the managers.

Furthermore, historical cost is useful in control purpose to a company. It is a objective system which records the original cost of an item when it purchased. In traditional accounting, the objective of accounting is involving mainly the function of management. Records of past transaction are necessary for accountability. That is because it can provide the evidence foe determine how effective management has met its responsibilities. If used other method for recording maybe would less objective since the amount being recorded would depend on individual point and is diverse from difference people.

Another merit of historical cost is the reliability. Reliability is one of the important characteristics of financial report, it examined in the IASB's framework. Historical cost is use the original monetary value. As a past value, the value of assets historical cost is more dependably to determine than other accounting concept.

Nowadays, many financial report of company still used historical cost accounting concept in their accounting system. It are straightforward to record the value of assets, and easy to examined in the accounting framework.

Otherwise, the biggest shortcoming of historical cost accounting is it does not record the current market value of the assets. It omits the possibility of the current value of assets maybe higher or lower in the future. The value of the assets that recorded on the financial position is based on the cost of acquisition. This may causes the companies overvalue or undervalue the assets based on the out dated figures, especially in the time of inflation. It is possible for the companies to own a fixed asset more than 10 years time especially for the land and property that the value will increase subsequently over the years. As result, the owners of companies are not able to forecast the future cash flow of the fixed assets realistically. This may increase the difficulty for the shareholders to assess the real performance and capability of management of a company as the historical valuation basis does not recognise the market value of the assets.

Next, historical cost accounting also will lead to overstate the profits. As the historical cost accounting does not account the changes in current market price of the assets, it will cause the companies to undercharge the depreciation of assets. The companies will only charge the depreciation based on the acquisition cost instead of the actual replacement cost of assets at current prices. As result, the profits that recorded will not reflect the actual cost of the trading due to the historical cost accounting charge the cost of sale based on the acquisition cost of the assets. The incorrect profit figures will tend to reduce the company's capitals as the company needs to pay high dividends to shareholders and bear the high taxes for the high profits gained.

Another shortcoming of the historical cost accounting is it does not disclose the holding gains of an asset. If the company acquired an asset, for example land at a low price in the previous time, after a period of time, the price of the land may be higher than the cost of acquired. However, the gains for holding the land will not record on the financial statement. The gains will only recognise until it has been sold due to the historical cost principal and revenue recognition principal. This may distort the operating results of current year as the holding gains are actually accrued in the previous period instead of recorded in the period of it sold.

(2,638 words)

References

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Khandkar, S. (2008, August). What are the importance of bookkeeping? Retrieved July 1, 2012, from PublishYourArticles.net: http://www.publishyourarticles.net/knowledge-hub/accounting/what-are-the-importance-of-book-keeping.html

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