The Structure and Activities of a Not For Profit Organisation and Government - Coursework Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Title : Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx @2010 Table of Contents Table of Contents 2 Executive summary 3 Introduction 4 Activities of government or nonprofit and private education organizations 5 Tax exempt status of government and nonprofit education organizations 6 Operation of public and private education organizations 7 Fund accounting in government and nonprofit education organizations 8 Principles of fund accounting systems 9 Accounting in private education organizations 11 Developing an accounting and reporting principle for government and nonprofit education organizations 12 Fund structure for Not for profit and governmental accounting 13 Major funds reporting concept 13 Conclusion 14 Bibliography 15 Executive summary Government and not for profit organizations have different structures and activities and these diversities have an impact on how their accounting and reports are conducted. Government education organizations do not have a profit making motive and thus an accounting system that ensures accountability of the granted or donate finances is used. Financial reporting is directed to the government and organizations offering grants and donations and financial allocations are based on proper use of funds. Private education organizations have a profit making motive and uses an accounting system that monitors profitability with financial reporting being directed to managers. Fund accounting is used in nonprofit education organizations to monitor and record assets and finances awarded to these organizations. The offered funds and assets are intended for nonprofit organizations with a way of delivering quality education for which they are established. Introduction Government and non profit education organizations deliver education resources and services without the motive of making profit. The main sources of finances come from government grants and donations by charitable organizations. In addition to delivering education services to students, private education institutions have a profit making motive and their funding comes form owners or investors. Private education institutions are business entities and have students as customers as opposed to government education institutions who have students as beneficiaries. Government organizations have tax exempt status and are required to disburse funds for the operation activities of the institutions and publication of financial reports which entails their income and expenditure for the public. This report looks at motives of private and public education organizations, how they are funded and operated and the type of accounting systems used to monitor finances. Structure of government education organizations Several nonprofit educational organizations are operated by paid staff, volunteer of a combination of both, generally preserving the positions of senior executives to paid personnel, whereas the fields and entry level positions are regularly held by volunteers. In addition, a nonprofit educational organization has students as beneficiaries as opposed to students as customers in private or for private educational organizations. There might be internalized profit within a nonprofit educational organizational and generation of additional funds where income is more than expenses that may be held to create extra income and pay operating costs when other streams of revenue weaken. The ownership of a nonprofit education system lies within stakeholders, while that of private organization relies on investors. The net income of nonprofit educational organizations are utilized to further the goal of the organization through investing for security or paying for programs while that of private organization is distributed to partners, owners or shareholders. Activities of government or nonprofit and private education organizations Government or nonprofit educational organizations do not usually operate with the aim of generating a profit. Nevertheless, a nonprofit educational organization might accept, hold and expend finances and other valuable things. It might ethically and legally hold investments or trade at a profit, often limited to utilization of any finances generated from such commercial activities, exclusively and solely for accomplishing the aims of the organizations. The degree to which the organization may generate money might be restrained in methods and amount or by both, and the utilization of these profits might be limited in purpose and also in fractions regarding self continuance and attainment of purpose. Government of nonprofit education organization is therefore typically funded through donations from the public sector or private sector, or from both, and also from program service fees. Tax exempt status of government and nonprofit education organizations Government education institutions are funded through grants which are mainly from taxpayers money while not for profit education organization are funded by donations both from public and private sector. The nonprofit organization may be given tax excepted status but this status isn’t inherent to its formation and should be explicitly requested to tax supervising authority but the donations might at times be tax deductible. Additionally, government and nonprofit educational organizations are publicly subsidized whilst not being receiving direct support from all taxpayers. According to (Foundation center, 2011), public learning institutions are treated as government instrumentalists and thus exempted from federal tax on income and are eligible to receive contributions that are tax deductible from individuals. In order for them to qualify for tax exception status, the government and nonprofit organizations are supposed to satisfy a wide range of prerequisites. They should not have ownership of income and assets apart from that of the corporation itself. Externally, this means that there is no distribution of income in form of dividends or other forms of payments and internally, there is further need that the corporation doesn’t exist for benefit of individual board members or employees, and any payments made to these individuals in form of rent, contractual arrangement or salary is thoroughly scrutinized by the internal revenue service (U.S. Federal office of management and budget, 2011). Operation of public and private education organizations Several countries have laws that govern the establishment and management of government and nonprofit education organizations which need conformity with regimes of corporate governance. There is a requirement for these organizations to publish financial reports such entailing their expenditure and income for the public. In contrast private institutions are not much influenced by government organizations since they are business entities operating in a free market economy. Both private or for profit and public education organizations are supposed to have steering committee members, board trustees or members who owe them a fiduciary duty of trust and loyalty( FASB, 2011). Tooley (2000) argues that government or nonprofit educational organizations don’t operate within competitive marketplaces. Economists usually view government and nonprofit educational organizations as a remedy to market failure, the notion that there are public or collective goods and services, which aren’t adequately profitable for business to offer them at the rate that the public wants or needs them. For instance, education offers benefits to the community that go beyond those that may be precisely valued within a market transaction. As a consequence, education is undervalued, and therefore underprovided, within a market economy that depends on profits for behavior motivation. Private education organizations operate in competitive market with aim of making profit through delivery of education services and infrastructures with profits being used to motivate operation of shareholders who are either the owners of the institutions or investors. Government and nonprofit education organizations entities which aren’t motivated via financial gain may make up market fall. This form of market failure offers an economic rationale for the government to subsidize nonprofit or business organizations to endorse a greater creation of undervalued services or goods. Fund accounting in government and nonprofit education organizations Government and nonprofit education organizations are not interested in profit making and thus use an accounting scheme known as the fund accounting. Fund accounting usually groups the financial data together into accounts or funds that share an identical purpose. This system is used in government and nonprofit education institutions to measure accountability other than profitability since there isn’t a profit motive. Financial reporting is directed to the public other than investors as is the case in private education institutions. Through this, the organization has a better idea of which education resources are available to accomplish an educational task. The fund accounting is used for monitoring and recording of assets and money that were awarded, contributed, entrusted or appropriated to the coffers of government and nonprofit organizations. The assets and funds are conveyed so as to offer the nonprofit entity with the means to execute the delivery of the specific educational mission or purpose for which the institution was established or created. Fund accounting helps government and not for profit education organizations to present their liabilities and assets. They are organized and grouped in a way that will display how and where the finances of the organizations are spent. It is also utilized in preparation of reports for individuals or companies who give grants or donations to these organizations. The fund accounting report gives the donating or granting organizations an idea of how their funding is utilized (Beechy, 2007) Principles of fund accounting systems Segregation of expenditure is an important principle of fund accounting system. Government or nonprofit education organizations are supposed to segregate their spending for the gain of sources of their funding. There are two major classifications of finances for fund accounting namely special purpose funds and general funds. General fund is identical to the organizations general ledger account and records every liability and asset of the entities that aren’t assigned to special purpose fund. It offers resources essential for maintenance of everyday activities and therefore pays for every operating and administrative expense. The budget principle of fund accounting requires, accounting books or budget reports must have detailed reporting of expenses and revenues for the previous year, costs increases, and asset accounting. This will assist the organizations to settle on a budget presumption of the coming year. Cost principle of fund accounting requires the expenses of government and nonprofit education organizations to comply cost principles dictated by the law. The expenses should only be utilized for payment of legitimate activities of the organizations and there should be reporting on documentation of activities. The budget for these organizations is approved once they meet the laws of allocation of funds. The accounting of government and nonprofit education organizations should complete chart of accounts, cash disbursements, cash receipts, a ledger and payroll which all help in keeping track of expenses details (University of Phoenix, 2010). The main aim of fund accounting is to present a precise financial report on the way money is spent, to illustrate that money was spent in accordance with the budget of the education program and within the provisions stipulated as conditions of fund granting. Hess (2002) argues that if there are no any provisions or restrictions for use of funds, the organization is supposed to present a financial report on how it wisely disbursed the funds in accord with the fund accounting guidelines of financial accounting standards board for unlimited donations. In public and nonprofit educational institutions, funds come from numerous forms of sources entailing government grants. Since the finances received by the entities are exempted from tax, the internal revenue service needs them to differentiate their organizations as either receiving direct public support or indirect public support. This requirement helps to clear path for tracing not for profit solicited or publicly donated funds are utilized. This is important in prevent whether they are coming from private contributions and allocations or form government and also in preventing the use of public and nonprofit education organizations as tax shelters. In the real sense, public donations offered by private corporations are exempted from taxes up to an acceptable percentage only and therefore it is the task of fund accounting for publicly donated monetary resources to rest on nonprofit organization (Hope, 2010) Accounting in private education organizations The private organizations have a motive and thus their accounting system measures profitability. Management accounting system is used in analyzing and recording of financial data of the organization. The data is used to execute tasks like asset management, performance evaluation, cost management and budgeting. The annual report is the internal financial operating and most important document used in private education organizations. According to Downes, (1995, 23), annual report is a comprehensive report the financial activities of a business organization throughout the previous year. Annual report gives shareholders information on the organizations activities and financial performance. They are usually involved in budgeting for release of new strategies of effective cost control, together with preparing fiscal data for tax authorities and investors. As opposed to fund accounting, management accounting mainly looks at current and past data so as to plan for future. Managers of private education institutions use this accounting information to make sound financial decisions on how to run the institutions better. Several nations which relied on the public institutions have adopted tactical strategies so as to lessen reliance on state for funding institutions of higher learning. Several institutions have been privatized and this implies application principles of market private sector principles in higher education in financial management and operation (Johnstone, 2011). Developing an accounting and reporting principle for government and nonprofit education organizations Several government and not for profits education institutions take part in business activities such as cafeterias and stationery stores which make it difficult to develop accounting and reporting standard principles for them. This is because they offer financial statements reporting their financial position and shifts in financial position of individual fund groups. The financial statements for these organizations usually entail balance sheet, financial position statement, income statement, operations statement, statement of shifts in net assets and a cash flow statement (National center for education, 2003). The budget is the most significant financial document produced by government and not for profit education organizations. The budget projects future expenses and income and is used to estimate if the institution can continue operating with its projected expenses and income. The content of the financial statements are normally restricted to financial information on events and transactions. In addition, the financial statements are based on representations of past financial events, and transactions other than future financial events and transactions , even though they usually needs estimates to be made in expectation of future events and transactions and entail measurements that are usually approximations. Fund structure for Not for profit and governmental accounting For governmental and nonprofit educational institutions to ensure appropriate segregation of resources and funds and maintain a suitable accountability, the accounting system must be organized on a fund basis. Government accounting standards board defines a fund as an accounting or fiscal unit that has a self balancing set of cash and other monetary resources, as well as all related residual balances or equities, and balances and shifts therein, which are set apart for the aim of accomplishing particular objectives or undertaking certain activities in accordance with particular limitations, restrictions or regulations. Government permanent funds are supposed to be utilized in reporting of education resources that legally restrained to the level that income might be used for activities that support reporting government programs. Major funds reporting concept Governmental and not for profit funds are those via which most governmental education functions are accounted for. The theory of major fund reporting introduced by government accounting standards board simplify the presentation of finance information of government and not for profit education institutions and to pay attention on main activities of the reporting entities. For instance, rather than requiring every form of funding to be presented individually, United States government accounting standards board statement number 34 requires individual presentation of major funds only, with other funds merged into a sole column. This lessens the figures of finances presented on the financial statement and directs focus on to the important funds of reporting entities (GASB, 2011). Major funding is applied to governmental funds which include special and general service, debt service, and permanent and capital project funds and enterprise funds. Internal service funds are not included in the requirements of the major fund reporting and fiduciary finance information is presented by the form of fund other than by major funds. When applying for major fund principle to enterprise funds, the reporting government or not for profit education organization is supposed to consider both nonoperating and operating expenses and revenues, together with losses, gains, capital endowments and additions to permanent donations. Conclusion Private and government and nonprofit profit education institutions have different activities and sources of funding with private organizations receiving funds form owners and investors and government organization receiving funds form grants and donations. Private organizations have the motive of making profits while government organizations do not have profit making motives. Therefore, these diversities make them to have different of accounting and reporting schemes. Private organizations use management system to monitor profitability directing financial information to managers while government and nonprofit education organizations use fund accounting for monitoring accountability on use of funds and directs their financial reporting to the organizations offering grants and donations. Bibliography Beechy, T, 2007, Does full accrual accounting enhance accountability, Retrieved on February 11, 2011 from University of Phoenix, 2010, Not for profit and government accounting. Retrieved on February from Downes, J, 1995, Dictionary of Finance and investment Terms, Retrieved on February 24, 2011, from< http://www.accountingtools.com/definition-wrap-report> FASB, Facts about FASB. Retrieved on February 11, 2011 from Foundation center, Can public schools apply for grants from private foundations. Retrieved on February 11, 2011 from GASB, Summaries and status of all GASB statements and interpretations. Retrieved on February 11, 2011 from Hess, F, 2002, Making sense of the Public in public education. Retrieved on February 11, 2011 from Hope, T, 2010, The Unique structure of nonprofit accounting. Retrieved on February 11, 2011 from Johnstone, B, Marketization and management in higher education, Retrieved on February 11, 2011 from Read More