Accounting For Non-Profit Making Organizations.
. Introduction.
A nonprofit organization (NPO) is an organization which is not driven by the profits or with motives of making profit but instead is driven by a course. These organizations are fully accountable to their members or the public in general. The organizations include thecharitable institutions, religious institutions, clubs, educational institutions, trade unions, etc.
Their main objective is to provide services to the community, however, during their operations, they may make such profits, but since their benefits are not derived from manufacturing of goods and services for benefits, they do not prepare the profit and loss account. They credit their funds to the Capital fund account (Anheier, 2006)
- Importance of principles of accounting.
The accounting principles become essential due to the following reasons;
They provide control to the financial statements. The control is significant since because it allows for transparency and prevents any form of fraud from unethical accountants who may attempt to prepare financial statements that do not reflect the accurate and fair state of the company’s performance. Incorrect reporting by the statements may lead to losses and financial distress by the company.
Provides comparisons. When a firm follows the financial principles, it becomes very easy to compare their performances with other companies, which follow the same principles. This is because they have similar procedures for preparing financial statements. Comparisons are very critical because they make a company become aware of the trends and performances of the industry in relation to other companies; thus can make corrections where they might be going wrong.
Ease of Auditing; the companies which follow the financial principle are to perform audit because the auditors know the principles. Auditing indicates the performance of the company and provides the investor with information about the company.
- Uses of financial information from Non-profits.
The users of financial information can either be internal or external. The internal users are the management when they need to assess how they have discharged their responsibilities of managing and protecting the companies resources. They also use the information in making decisions on borrowing and investing their money.
The external users include the creditors, lenders, government and the general public. Thegeneral public may require financial information to know how the organization is being managed and how it spends its resources.
- Why the matching principle is very important.
The coordinating guideline necessitates that expenses should be seen and recorded when those expenses can be facilitated with the earnings those costs helped with making. By the day’s end, costs shouldn’t be recorded when they are paid. Expenses should be recorded as the relating wages are recorded. The essential motivation behind why organizations hold fast to the matching principle is to guarantee consistency in budget reports, for example, the pay proclamation, financial record, and so forth.
- Current and Long-term Assets.
Current assets are those assets which can be easily converted into cash within a financial year. Current assets are used to facilitate day-to-day operations of an organization’s investments and expenses. While long term assets which cannot be easily converted into cash within a fiscal year. They include the plant, equipment and machinery that is owned by the business.
The major difference between the two is that Long-term assets undergo depreciation, which partitions an organization’s expense for non-current advantages for costing them over their useful lives. Depreciation enables an organization to stay away from significant losses when an organization makes a fixed resource buy by spreading the expense out over numerous years. Current resources are not depreciated in light of their short life.
Depreciation is the lessening in the estimation of a benefit due to utilization, area of time, mileage, utilization or other such factors. At the point when a benefit is bought and puts in administration, you are permitted to discount a bit of the price tag every year as devaluation cost.
Depreciation is necessary because it provides the stakeholders with information about asset use. The stakeholder can use this information and expect when the replacement of the asset is due. For instance, a production company will always replace a machine at some point in the future, when the accumulated depreciation is almost equaling the purchase value of the machine, the management becomes aware that replacement is required (Powell & Steinberg, 1989)
- Why does a nonprofit need a chart of accounts?
A chart of account (COA) is a list of all the monetary records in the general ledger of an organization. To put it plainly, it is an authoritative instrument that gives a good breakdown of all the related financial exchanges that an organization directed during a particular bookkeeping period, separated into subcategories. Nonprofit organizations need a chart of accounts to provide more insightful financial analysis and improve transparency with the donors. It increases transparency and visibility with donors and financiers by merging all the financial data which fully describes all the information to the donors on the progress and impact the organization is making.
- When does a nonprofit pay federal taxes?
There are a few exercises that a charitable not-for-profit could be exhausted on, generally as an inconsequential business movement. That could happen when a not-for-profit maintains an undertaking to enhance its pay, and when that movement can’t to the not-for-profit’s centre strategic reason.
- Peer reviews
How “hybrid” Nonprofits can stay on a mission: As not-for-profits add more revenue-driven components to their plans of action, they can endure mission float. Partner Professor Julie Battilana says half breed associations can remain on track on the off chance that they centre around two factors: the workers they contract and how they mingle those representatives. Key ideas include: In request to maintain a strategic distance from crucial, hybrids associations need to concentrate on whom they contract and whether their workers are available to socialization. Since early socialization is so significant, half and half firms might be in an ideal situation procuring new school graduates with no work foundation as opposed to a blend of prepared investors and social labourers. The more drawn out their residency in a mixture association, the more probable top administrators might be to employ junior individuals (Kaplan, 2001).
- Financial statements for Nonprofits.
The financial statements issued by the nonprofits are different from the reports issued by the profit-making organizations. The difference is highlighted below.
- The fiscal summaries are comparable except for that a net resources net segment replaces the value segment that a revenue-driven substance employments.
- This announcement contains data about the progressions of money into and out of a not-for-profit; specifically, it shows the degree of those charitable exercises that produce and use cash.
- This announcement shows how costs are acquired for each practical AREA of the business. Utilitarian zones frequently incorporate administration and organization, raising money, and projects.
References.
Anheier, H. K. (2006). Nonprofit organizations: an introduction. Routledge.
Powell, W. W., & Steinberg, R. (1989). Nonprofit Sector. Yale University Press.
Kaplan, R. S. (2001). Strategic performance measurement and management in nonprofit organizations. Nonprofit Management and Leadership, 11(3), 353-370.