Analysis of the Accounting Cycle in Non-profit Organization - Case Study Example

Analysis of the Accounting Cycle Analysis of the Accounting Cycle in Non-profit Organization Qatar Foundation for Education, Science and Community Development (QF), headquartered in Doha, Qatar, is a chartered semiprivate, non-profit organization that supports community development, education and science and research in a bid to nurture the nation’s future leaders (WHO, 2009). It is mainly funded privately, but also receives government funding as well as support. Although the foundation has its main focus on preserving the national culture while at the same time supporting the endevour towards a knowledge economy rather than a carbon economy without necessarily earning profits, it needs efficient accounting systems for performance (Rodriguez & Fins, 2005). On the other hand, the accounting cycle is a process that begins with analyzing transactions through several phases involved in the accounting of the business activities in a single accounting period. In this paper, the source documents of QF will be analyzed. These are documents such as invoices, bank deposit slips and receipts. The accounting principles applicable in this step include the revenue recognition principle, among many, and this stresses the fact that all transactions should be recorded whether the money has been received or not. Other principles applicable in the first step of the accounting cycle include the matching principle. Like the revenue recognition principle, the costs that generated income are the only ones which are recorded. The cost recognition principle stresses that assets should be recorded with their initial price. The going-concern principle states that all business transactions are focused on achieving the long term goals of an organization to enable the business to continue with its operations (Needles, 2013). Finally, the conservatism principle states that the cost estimates should reflect the real costs. The accounting cycle at QF entails the key components that include bookkeeping, the generation of financial statements and the analysis of information obtained from the statements. QF can be categorized as a non-profit organization mainly because of its focus on philanthropically oriented objectives and operations. Through its joint ventures that support the creation of specialized skills geared towards developing the nation’s economy, the foundation generates significant income and profits. However, since the foundation was mainly created as a non-profit organization, all the income and profit it generates from its joint ventures are ploughed back 100% into the core non-profit initiatives it runs. The next phase in the cycle is to make a journal entry of the transactions (Needles, 2013). When making a journal the accounting principle of double entry rule should be adhered to. The double entry rule requires that the debits be equal to the credits. The third phase in the cycle is to post which the transfer of information from the journal to a ledger. Supposing QF had a debit of 30,000 USD in the cash account and a credit of 30,000 USD in the common stock account, both transactions are transferred to the ledger. All the phases after the third phase are done towards the end of the financial period. The fourth phase in the accounting cycle is to prepare an unadjusted trial balance (Schmidt, 2014). This is a record of all the entries at a given time in a financial period. The transactions that are used when preparing a trial balance all come from the ledger entries. This phase overlooks any errors made and focuses on balancing the credits with the debits. The fifth phase in the accounting cycle is the preparation of adjusting entries. This requires updating and adjusting all the entries to their right figures. These are then posted to the adjusted trial balance which has the primary function of ensuring a there is a balance between the debits and the credits. After adjusting the trial balance, the next phase is preparing the financial statements in which the income statement, statement of retained earnings, the statement of financial position and the statement of cash flows are prepared. The eighth phase in the accounting cycle is preparing the closing entries. This is done in preparation of business transactions for the next financial period. The ninth phase is the preparation of the closing trial balance. This is a recording of business transactions in the capital accounts only and its main purpose is to ensure the current accounts have a zero balance. QF records its business transactions using ledgers. They post all the cash received in a cash receipt journal and all checks received in a disbursement journal. They also use the accounts payable ledger, accounts receivable ledger and sales journal. They use the accrual-based system which involves recording a transaction even when payments have not been made (Needles, 2013). Every transaction recorded must have a supporting document for example every cash or cheque payment received must have an invoice to which a customer was given for them to make the payment. QF uses an automated accounting system which automatically records the business transactions, updates ledgers and processes the financial statement and generates the reports required for filing taxes. All their transactions are recorded according to account numbers which are used in developing the financial statements. QF has designed a chart of their accounts with the assets, liabilities, revenues, expenses sections and fund balances. They report their business transactions as per the programs and supporting. All their business transactions that are directly involved with customer service are regarded as program transactions while general management costs as supporting transactions. Once a month, the QF prepares a trial balance with the help of their board treasurer. They record all their journal entries from the business transactions and put them in a general ledger. With the double-accounting rule as the main principle, the debit and credit entries in the ledger should be equal (Hongren, 2006). All the business transactions made are compared with the invoices and billing forms that were created to evoke the payments just to be sure the posts match with the supporting documents. This is a step done to ensure there is little or no room for error. Any missing information or errors found are adjusted. To avoid any further errors or theft cases, QF has put up a secure system that only allows authorized personnel inside some parts of the building and who can get access to certain information. Two different employees are required for receiving the business mails and depositing the cheques that are received. Large disbursements are counter signed by personnel from the treasurer board. QF prepares audit reports as is mandatory to the organization. The audit committee summarizes how well or poorly the organization uses its resources. This ensures that the company is going in the right direction. From this stage hence forth, QF’s accounting cycle phases are done during the end of their financial period. The income statement shows the difference in the assets during the financial period. From the income statement QF is able to know their value at the end of a single financial period. This displays net assets which is the total assets minus the total liabilities. Net assets are categorized in to unrestricted, temporarily restricted and permanently restricted assets. The changes in net assets are not complicated as is a characteristic to all Non-profit organizations (Needles, 2013). QF’s donors are very keen to the statement of the financial position prepared. The statement of financial position depicts the position of the organization at a given period. It determines whether a company should continue operations or if it should be liquidated. As a non-profit organization, the net assets are equal to the equity. The net assets of QF are either restricted or unrestricted. The restricted net assets are controlled by donors or by legal requirements unlike the unrestricted net assets which are not controlled by any of the two bodies. The restricted assets are used according to a specified time or purpose exclusively. The statement of cash flow is prepared to record how the cash available for the financial period was used (Schmidt, 2014). The methods that are used to finance and invest resources in a given financial period in QF are recorded in the statement of the cash flow. The business activities recorded here are categorized as operating, investing or financing activities (Hongren, 2006). QFs’ operating activities include long-term restricted contributions, grants and receipts from the sales of their services. These are operating activities which bring cash into the organization. Some operating activities that flash money out of the foundation include disbursements to the employees, vendors or contractors and disbursements made for projects that the organization funds. Some other operating activities that contributed to the out flow of cash were grants made by QF to other organizations. Investing activities in QF include giving and receiving loans, purchasing and selling of property, plant and equipment, and the disposition of equity investments. The cash coming in from investing activities include selling of property, plant and equipment, and from giving out loans. The cash going out from the investing activities like acquiring new property, plant and equipment and disbursement of loans. Some of the financing activities that QF incurs is taking loans and repaying other loans, and acquiring resources to pay for resources acquired on credit. Another financial activity would be acquiring cash from donors with intentions of achieving long-term goals but have not achieved this purpose and is still being held. The cash coming in from these activities include receiving of donor funds that are intended for long-term purposes, interest and dividend that are intended for long-term use, and both the short and long term loans. The cashing flowing out for financial activities includes the repayment of both the short and long-term loans, and repayment of the capital leases. QF presents its statement of cash flows using the direct method as frequently used by most non-profit organizations. The direct method accounts for every actual receipt and disbursement of any cash inflow and outflow (Hongren, 2006). References Hongren, C. (2006). Cost accounting: A managerial emphasis. New Jersey: Pearson. Needles, B. (2013). Principles of financial accounting. London: Cengage. Rodriguez, P., & Fins, J. (2005). The globalization of education in medical ethics and humanities: Evolving pedagogy at Weill Cornell Medical College in Qatar. Academic Medicine, 80(2), 135-140. Schmidt, M. (2014). Business Encyclopedia: Ledger, general ledger and nominal ledger. New York: McGraw. World Health Organization (WHO). (2009). Country profiles: Qatar. Geneva: Author. Read More