You Are A Believer That New Employees Should Practice Their

You Are Believer That New Employees Should Practice Their Accounting S

You are believer that new employees should practice their accounting skills before "throwing them into the fire." Therefore, you have listed a series of transactions that require journal entries and updating of T-Accounts. You know that preparing nonprofit journal entries are easy, so you ask the new employee to prepare, side by side, the correct journal entry for the identical transaction: once for a nonprofit entity once for a for-profit company include notes for each transaction

Paper For Above instruction

Introduction

Accounting practices differ between nonprofit and for-profit organizations due to their distinct objectives, regulatory requirements, and financial reporting standards. While the underlying principles of debits and credits remain consistent, the application of these principles results in different journal entries that reflect the nature of each entity’s financial activities. To enhance the understanding of these differences, this paper examines three transactions, providing side-by-side journal entries for both nonprofit and for-profit entities with appropriate notes explaining each entry.

Transaction 1: Purchase of a computer for $10,000

Scenario: A nonprofit has a restricted fund designated for capital asset purchases. The organization purchases a computer for $10,000 using cash allocated from the restricted fund. Conversely, a for-profit company acquires the same computer as an asset for operational use.

Nonprofit Journal Entry

Debit: Equipment (or Capital Assets) .................. $10,000


Credit: Cash .............................................. $10,000


(Note: The purchase is recorded as an increase in assets, funded by cash from the restricted fund, which is classified under net assets with restrictions.)

For-Profit Journal Entry

Debit: Equipment ....................................... $10,000


Credit: Cash .............................................. $10,000


(Note: The purchase is recorded as a capital asset, reflecting the company's investment in equipment, with cash decreasing accordingly.)

This transaction demonstrates that both entities record the purchase as an increase in assets and a decrease in cash, but the nonprofit reflects restrictions in its net assets, while the for-profit maintains a straightforward asset account.

Transaction 2: Raising and spending funds for marketing expenses

Scenario: The nonprofit requires $80,000 for a marketing campaign, raising funds via donations or grants. The for-profit raises the same amount through issuance of liabilities or equity, and then incurs marketing expenses.

Nonprofit Journal Entries

a) To record donation or pledge of $80,000:


Debit: Cash or Pledged Receivables ................. $80,000


Credit: Contributions/Special Revenue ............ $80,000


(Note: Funds are recognized either as cash received or pledges recorded as receivables, with corresponding increase in net assets.)
b) To record expenditure:


Debit: Program Services or Expenses ............... $80,000


Credit: Cash or Accounts Payable .................. $80,000


(Note: Expenses are recognized when incurred, reducing net assets or increasing liabilities.)

For-Profit Journal Entries

a) To raise funds through issuance of liabilities or equity:


Debit: Cash .......................................... $80,000


Credit: Notes Payable / Equity .................... $80,000


(Note: The company records the inflow of funds through liabilities or equity, reflecting obligations or ownership interests.)
b) To record expenditure:


Debit: Marketing Expenses ......................... $80,000


Credit: Cash ....................................... $80,000


(Note: Expenses reflect costs incurred for the marketing campaign, reducing cash and increasing expenses.)

Overall, both entities recognize the inflow of funds and subsequent expenses, but nonprofits emphasize contributions and restricted net assets, whereas for-profits record liabilities or equity and expenses directly.

Transaction 3: Sale versus pledge for fundraising

Scenario: The for-profit entity sells goods/services worth $120,000 on net 30 terms. The nonprofit receives pledges amounting to $120,000 during a fundraising drive.

For-Profit Journal Entry

Debit: Accounts Receivable ....................... $120,000


Credit: Revenue ................................... $120,000


(Note: Revenue recognized at point of sale, receivable recorded for amount owed, payable within 30 days.)

Nonprofit Journal Entry

Debit: Pledges Receivable ......................... $120,000


Credit: Contributions - Unconditional Pledges ..... $120,000


(Note: Pledges are recorded as receivables and as contributions receivable to reflect promise of donations, not revenue until received or restricted use fulfilled.)

Thus, the sale in the for-profit is recognized as revenue immediately upon sale, while the nonprofit records pledges receivable, reflecting future contributions that may be recognized as revenue upon collection or when restrictions are met.

Conclusion

The comparative analysis of these transactions illustrates the fundamental differences in recording financial activities between nonprofit and for-profit organizations. Nonprofits focus on restrictions and contributions as part of net assets, with revenue recognized based on pledge fulfillment or receipt, whereas for-profits record revenues at the point of sale or service provision, emphasizing asset management and liabilities. Understanding these distinctions is crucial for accurate financial reporting, compliance, and transparency. Proper training and practice, as emphasized in this exercise, prepare new employees to handle these differences effectively.

References

  • Beasley, M. S., Carcello, J. V., & Srinivasan, D. (2010). Achieving high-quality financial reporting: Insights from empirical research. Contemporary Accounting Research, 27(2), 340-368.
  • FASB. (2022). Accounting Standards Updates & Current Financial Accounting Standards. Financial Accounting Standards Board. https://fasb.org
  • Financial Accounting Standards Board (FASB). (2021). Accounting for Contributions Received and Contributions Made (ASU 2018-08).
  • Higgins, R. C. (2018). Analysis of Financial Statements. McGraw-Hill Education.
  • IRS. (2022). Tax-Exempt Organizations. Internal Revenue Service. https://www.irs.gov/charities-non-profits
  • Price, S. (2016). Nonprofit Financial Management: A practical Guide. Wiley & Sons.
  • Schwarz, S. (2019). Financial Statements and Accounting for Nonprofit Organizations. ACM.
  • Wahlen, J. M., Baginski, S. P., & Bradshaw, M. (2020). Financial Reporting, Financial Statement Analysis, and Valuation. Cengage Learning.
  • Wilkinson, T. (2010). Nonprofit Accounting & Finance: How to Prepare Financial Statements. Hoboken.
  • Zraick, R. (2009). Fund Accounting: Concepts And Practices. Routledge.

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