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Analyze the following scenario: The Unified Path is an umbrella organization that solicits donations to support its many charitable suborganizations. One of these is the Millbridge Family Service (MFS). All transactions for MFS are handled through the MFS special purpose fund. For both the United Path general operating fund and MFS special purpose fund, show the impact of the fundamental equation of accounting of each of the following events.

Unified Path transfers cash to the MFS bank account for $50,000 for the MFS family counseling program. This is a direct subsidy to MFS. No repayment is required. Unified Path has a bookkeeping department which assists the suborganizations with their purchase of insurance, supplies, payroll, and other items. This centralized approach is less expensive than if each part of the larger organization had its own bookkeeping staff.

Unified Path charges MFS $400 for bookkeeping services for the month. No payment is made at this time. MFS borrows $20,000 from Unified Path’s general fund to meet a current operating shortfall. MFS will repay this loan from money received from charges to its clients within six months.

Paper For Above instruction

The provided scenario explores the financial transactions involving the umbrella organization, Unified Path, and its subordinate charitable organization, Millbridge Family Service (MFS). The focus is on analyzing the impact of each event on the fundamental accounting equation, which states:

Assets = Liabilities + Equity.

Each transaction influences either the assets, liabilities, or equity, and understanding these effects is crucial for accurate financial reporting. This paper systematically examines each event described and demonstrates how they alter the components within both the general operating fund of Unified Path and the special purpose fund of MFS.

1. Transfer of Cash from Unified Path to MFS

Unified Path transfers $50,000 to MFS for the family counseling program. In accounting terms, this transaction involves a decrease in Unified Path’s assets (cash) and an increase in MFS’s assets (cash). Because this is a direct subsidy, it does not involve a liability or an equity change for either entity at the point of transfer. The impact on the fundamental equation is as follows:

  • Unified Path:
    • Decrease in assets (cash): $50,000
    • No change in liabilities or equity
  • MFS:
    • Increase in assets (cash): $50,000
    • No change in liabilities or equity initially

This transfer effectively reallocates resources within the assets of both organizations without affecting liabilities or equities directly.

2. Bookkeeping Service Charge

Unified Path charges MFS $400 for bookkeeping services, but no payment is made immediately. This transaction creates an accounts receivable for MFS and accounts payable for Unified Path. In terms of the fundamental equation:

  • Unified Path:
    • Assets decrease by $400 (accounts receivable), or if the receivable is recognized, accounts receivable increase; concurrently, revenue or income increases, affecting equity.
  • MFS:
    • Assets increase by $400 (accounts payable or accrued liabilities), and expenses increase, decreasing equity.

Since no cash transfers immediately, the focus is on recognizing the receivable and payable, which impact assets and liabilities, respectively, and ultimately influence equity through revenues and expenses.

3. Borrowing Funds from Unified Path

MFS borrows $20,000 from the general fund of Unified Path to cover a shortfall. This involves an increase in MFS's assets (cash) and an increase in liabilities (loan payable). For Unified Path, this is an increase in assets (cash loaned out) and a corresponding decrease in assets (cash transferred), but the loan from the general fund to MFS is recorded as a receivable for Unified Path and a payable for MFS.

  • Unified Path:
    • Assets decrease by $20,000 (cash loan to MFS)
    • Liabilities remain unchanged regarding the loan; instead, it’s an intra-organizational receivable
  • MFS:
    • Assets increase by $20,000 (cash received)
    • Liabilities increase by $20,000 (loan payable)

This transaction increases both assets and liabilities for MFS, impacting the fundamental equation by increasing both sides.

Conclusion

Each of these transactions demonstrates distinct impacts on the components of the fundamental accounting equation. Transfers and loans affect assets, liabilities, and equity accordingly. Accurate recording of these events is critical for reflecting the true financial position of both Unified Path and MFS. Centralized bookkeeping services and intra-organizational transfers emphasize the importance of clear delineation between organizational levels, ensuring transparent and compliant financial reporting.

References

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