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Sample essay topic, essay writing: Budgeting - 1760 words
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.. not reflect current conditions. Some companies rely on 'rolling' or 'continuous' forecasts rather than on traditional annual budgets. The chief difference between such forecasts and traditional budgets is that the forecast is updated with actual results as the company moves through the year. Figures for three or more subsequent quarters are projected in decreasing degree of detail.
One way in which companies build flexibility into budgets is to prioritize according to strategic importance action plans that were rejected due to resource limitations. By doing this, they can act swiftly and decisively if additional resources become available. Another way in which best practice companies develop budgets that accommodate change is to require managers to create scenarios based on a variety of assumptions about business conditions. The affordability of powerful information technology allows for the creation of many 'what if' scenarios. This practice makes it possible for companies to respond more quickly and effectively if actual conditions follow the pattern of a particular scenario
Companies also build flexibility into budgets by setting aside funds at the business-unit level to take advantage of competitive opportunities. Some companies even establish separate subsidiaries to look into promising products or technologies.Considering all of the suggestions from Arthur Anderson pertain to any type of organization, there is a case that my hypothesis is correct that there is not budgeting differences between profit and non-profit organizations.Anyone familiar with generally accepted accounting principles and practices will find most accounting for nonprofit activity to be very familiar. There are, however, some significant differences which include:. Accounting for Contributions. Capitalizing and Depreciating Assets.
Use of Cash- and Modified Cash-Basis Accounting. Functional Expense ClassificationAccounting for Contributions:Nonprofits, which qualify for tax-exempt status under section 501(c)(3) of the Internal Revenue Code are entitled to receive contributions that are tax deductible to the donor. Since this is unique to the nonprofit sector, there are no equivalent procedures for handling contributions in for-profit accounting. Special procedures have been established for handling the following types of contributions:. Pledges (Promises to Give) In 1993, the Financial Accounting Standards Board (FASB) issued the Statement of Financial Accounting Standards No. 116, Accounting for Contributions Received and Contributions Made. This Statement sets down firm guidelines for pledge accounting, requiring that legally enforceable, unconditional pledges be recorded in the accounting records. An unconditional pledge is one, which is not contingent on some uncertain future event, such as a matching grant from another donor.
Donated Materials and Services ( In-Kind Contributions) FASB Statement No. 116 guidelines also requires that nonprofits account for contributions of most goods (with the exception of works of art and other items held in museum collections). In addition, volunteer time must be included in the financial statements when either:1. the volunteer time results in the creation or enhancement of non-financial assets, such as volunteer labor to renovate a child care center; or2. the services volunteered are specialized skills, such as those provided by accountants, nurses, electricians, teachers, or other professionals and craftsmen. Special Events and Membership Dues People who pay to attend fundraisers (such as dinners, auctions, fashion shows, bake sales, etc.) often receive a tangible benefit in return (a meal, a performance, etc.) Similarly, membership dues may entitle individuals to use facilities, receive services, etc.
The portion of the special event charge or membership dues which represents the fair market value of the benefit received is not tax deductible to the donor. Some minimal benefits are excluded from this rule.In addition, the accounting profession has established guidelines for responsibly tracking monies, which have been restricted by the donor for a specific use (e.g. buying a new building, starting a new program, adding to the endowment, etc.). How these monies are tracked and reported depends on the nature of the donor s restriction, what conditions, if any, the donor has imposed on the organization before it can actually receive or use the money, when the restrictions are met, etc.Capitalizing and Depreciating AssetsAs in for-profit accounting, nonprofits are required to record the purchase of long-lasting, substantial property and equipment (such as computers, vans, buildings, etc.) as assets in the financial records, and to charge a portion of the cost of those items in each year in which they have a useful life. This process is called capitalizing and depreciating fixed assets. While all businesses, including nonprofits, are required to record depreciation of assets, some assets in the nonprofit sector receive special treatment. These include museum collections, historical buildings, library books, zoo animals, etc.Donated items that are added to collections that are held for public exhibition, protected and kept unencumbered, and subject to the policy that, if sold, the proceeds are used to acquire equivalent replacements for the collection, do not have to be recorded as re venue and are not recognized as formal assets in the financial statements.Use of Cash- and Modified Cash-Basis AccountingMany small nonprofits use cash-basis rather than accrual-basis accounting to record expenses and revenues.
This means that they only record revenue when the cash is received, and only record expenses when they are paid. Some nonprofits use a modified-cash basis of accounting. They will record payroll taxes withheld from employees or large revenue or expense items on an accrual basis. This means recording revenues when they are earned and expenses when obligations are incurred. Most businesses track all expenses and revenue s using accrual accounting.Functional Expense AllocationNonprofits are required to report their expenses by what is known as their functional expense classifications.
The two primary functional expense classifications are program services and supporting activities. Supporting activities typically include management and general activities, fundraising, and membership development. Practices vary widely from organization to organization in the nonprofit sector as to how expenses are categorized by functional areas.Implications of the Differences between Nonprofit and For-Profit AccountingIt is important to remember that financial information for nonprofits is interpreted differently from for-profit financial statements. The following is quoted from What a Difference Nonprofits Make: A Guide to Accounting Procedures, 1990, Accountants for the Public Interest:Meaningful evaluations and comparisons of nonprofit performance usually prove difficult and complex. While the profitability of two businesses can easily be calculated, it is much harder to compare the effectiveness of two counseling centers to see which is doing a better job of helping the mentally ill.
Without the standard of profitability, it is also difficult to compare the job performance of nonprofit staff and managers.Since the beneficiaries of nonprofits often cannot afford to pay for services, organizations frequently lose money on every sale. As a result, an increase in the number of clients or customers may paradoxically increase the likelihood of a financial crisis. On the other hand, turning a profit may mean that a nonprofit agency has turned away clients, perhaps including the most needy. To determine a nonprofit is success you must refer to its goals: these are the group's self-determined replacement for the bottom line of profit making. The board can measure a nonprofit's success by comparing the results achieved with the results sought.Legal DescriptionAlthough there are few laws or regulations that directly state how nonprofit organizations must operate their finances internally, many have a strong indirect impact. These indirect influences include IRS reporting requirements and the accounting standards most funding agencies require supported organizations to follow. In practical terms, these 'recommended' standards all but demand certain accounting and other financial practices be followed by nearly all nonprofit organizations.The IRS requires most tax-exempt organizations to submit an annual information report, the Form 990 and its relations, which includes a significant amount of financial reporting.
The report requires tax-exempt non-profits to complete:1. An object revenue & income statement, with particular categories specified (e.g. salaries, postage, rental revenue).2. A balance sheet, with particular categories specified (e.g. cash, accounts receivable).3.
A statement of functional expenses, in which all expenses are allocated to either program services, fundraising, or operations.4. A report of expenses segregated by individual program service (e.g. educational mailings, a seminar program).5. a support schedule that details the organization's sources of revenue, with particular categories specified (e.g. charitable donations, membership fees, investment income).
Because the IRS provides specific categories and classes into which revenue and expenses must be allocated, any organization that does not build its accounting system around these categories and classes would face serious hurdles preparing its annual IRS report. This provides in part a de facto basic standard for a non-profit's financial reporting. Fortunately, most of the categories given in the revenue & income and the balance sheet are standard accounting categories.Other aspects of the reporting requirements are more complex than would be required in small commercial businesses, but are not foreign to larger commercial operations. The report of expenses for individual program services roughly corresponds to divisional accounting methods, for tracking expenses incurred by different segments of an organization's total operation. Also, while the categories of income the IRS requires to be delineated are specific to nonprofit organizations (i.e. public contributions, unrelated business income), a fine resolution analysis of income sources is typical in large corporate financial accounting.
As in that case, the various classifications of income are necessary because the IRS requires different treatment of the income classes for determining taxes. Unlike in commercial reporting, the IRS also uses these revenue classifications to help determine if an non-profit will retain its tax-exempt status recognition. If an organization's financial accounting system does not or cannot assign these types of labels to income and expenses as required, completing the annual IRS report becomes an extremely arduous task, and adherence to financial standards required by regulators and granting agencies may be impossible. Fortunately, a wide variety of popular accounting software systems are available that have been designed to satisfy these needs. If the nonprofit organization uses an adequate accounting system, sets up its categories and classifications in line with the IRS reporting requirements, and assiduously labels all revenue and expenses appropriately, then completing the IRS annual report is a relatively painless matter.ReferencesBangs Jr, David H and Pellecchia, Michael, August 15, 2000, Action Plan: Forecasting and Cash-Flow Budgeting retrieved from web site http://www.muridae.com/ nporegulation/accounting.html on February 27, 2003.Critical Issues in Financial Accounting Regulation for Nonprofit Organizations, Online Compendium of Federal and State Regulations for U.S.
Nonprofit Organizations, retrieved from web site http://www.muridae.com/nporegulation/main.html on February 28, 2003Gruner + Jahr, January 12, 2000, Best Practices: Developing Budgets, Inc Magazine, USA Publishing. Inc.com, retrieved from web site http://www.inc.com/articles/ finance/fin manage/budget/16379.html on February 27th, 2003Hansen & Mowen, Management Accounting, 6th edition, 2003, South Western.
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