Financial Accounting (561)

Assignment 2

(Accounting for Non-Profit Organizations)

Name: Asifa Nazir

Roll Number: W-583956

Submitted to: Mr. Anwar Hussain

Allama Iqbal Open University Islamabad

(Department of Business Administration)

Acknowledgment

This assignment would not be possible (nor very useful) if library of Apna TV did not exist. For that, I would like to thank Mr. Syed Nabeel Hassan Tirmazi, head of Production department and Mr. Ameen, office coordinator for cooperating with me in collecting data for this assignment. [1]

Thanks to Mr. Brig.(R)M. Zubair Siddique and my tutor Mr. Anwar Hussain for giving me confidence in the subject and to apply it on real time scenarios.

Asifa Nazir

Roll No. W583956

Introduction to the Topic

Acconting for Non-Profit Organizations

“The brain starts working the moment you are born and never stops until you stand up and speak in public.”

(Anonymous)

Definition of Non-Profit Organization:

Non-profit making organization are those which do not buy or manufacture and sell goods and whose primary object is not to earn profit.

The object of Non-profit organization is to good to the society through welfare activities for example clubs, schools, colleges, hospitals, libraries etc. Their income, which is derived from donations, subscriptions, entrance fees etc ., is spend in achieving the objects for which they are started. From the book-keeping point of view the aim of non-profit organization is the pursuit of some interest other than financial benefits. Although these organization are not meant for profit earning, yet organization of this sort must have funds to promote their activates, and these funds must be honestly accounted for.

Definition of Fund:

A fund is a segregation of resources established to control and monitor resources and to help ensure and demonstrate compliance with legal/administrative requirements.

Definition of Fund Accounting:

A method of segregating resources into categories, (i.e., funds) to identify both the source of funds and the use of funds is referred as fund accounting.

Objectives of Fund Accounting:

Following are the objectives of fund accounting:

• Demonstrating accountability and stewardship

• Determining financial condition

• Planning and budgeting

• Evaluating organizational and managerial performance

• Determining/forecasting cash flow

• Communication

Fund Balance: Equity within a fund.

Assets = Liabilities + Fund Equity

Fund Assets Assets

_ _

Fund Liabilities Claims Against Assets

= Fund Balance = Fund Balance

The fund balance is also known as Net Assets, or Capital, or Net Worth.

Review of Literature

Profit Organization Vs. Non-Profit Organization:

In order to understand the working of accounts in non-profit organizations, we must have clear understanding nature of profit organization and non-profit organization.

Profit Organizations: Accounting emphasis is on profit determination.

Non-Profit Organizations: Accounting emphasis is on controlling funds and showing the sources and uses of funds.

Following are the comparisons between non-profit and profit organizations:

Profit Organization Non-Profit Organization

• Generally have only one accounting/ business entity.

• Encumbrances are not used.

• Accounting information on costs and revenues can usually be readily aggregated.

• Basic Financial Statements:

– Balance Sheet

– Income Statement

– Statement of Cash Flows

– Statement of Stockholders’ Equity

• Have a multitude of accounting/ business entities (various funds).

• Encumbrances are used.

• Accounting information is segregated and can be difficult to aggregate.

• Basic Financial Statements:

• Statement of Net Assets

– Statement of Net Assets

– Statement of revenues, Expenses, and change in net assets.

– Statement of Cash Flows

Managing Accounts in Non-profit Organization:

Final Accounts:

Non-Trading concerns usually maintain their accounts by the Double Entry system and periodically prepare their Final Accounts for the submission of their members and subscribers. The method of preparing final accounts by Non-Trading concern is different than trading concerns. As this concern don’t deal in any goods like trading concerns, so they cannot prepare Trading and Profit and Loss accounts. At the end of the year they make out an account called an income and expenditure account and balance sheet. Usually the Non-Profit organization doesn’t maintain a full set of books but merely a Cash Book in which all receipts and payments are entered.

Receipts and Final Accounts:

It is a summary of Cash Book for a year. Similarly to cash account, receipts are shown on the debit side while payments on the credit side, without any distinction between the capital and revenue. Moreover it does not include any unpaid expenditure or any unrealized income.

Income and Expenditure Account:

It is the name of profit and loss account. Such type of profit and loss account is generally adopted by Non-trading concern. This Account is credit with all expenses.

Income and expenditure account and Receipts & Payments account

The following table clearly shows the difference between a Receipts & Payment and Income & Expenditure Account:

Receipts & Payments Account Income & Expenditure Account

It is a summary of the Cash Book.

It begins with an opening and ends with a closing balance of cash.

It records all sums received and paid whether they related to revenue or capital items.

It includes all sums actually received and paid during the year whether they related to the past, the current of the next year.

The receipts are shown on the debit side and payments on the credit side.

It simply ends with a closing balance of cash and deos not show the result of the business.

It is not accompanied by a Balance Sheet.

It takes the place of Profit and Loss Account in non-trading concerns.

Doesn’t commence with any balance.

It includes revenue items only

It includes the items relating only to the year for which it is prepared. Provision is made for all outstanding expenses and the accrued income.

Income is shown on the credit and expenses on the debit.

It definitely shows whether there has been as excess of income over expenditure or vice versa.

It is always accompanied by a Balance Sheet.

Treatment of Peculiar Items

Generally in the exercises the instructions are given as to the treatment of special items. Such instructions are based on the rules of the concern. In case where no specific instructions are given the following guidelines may be considered.

Legacy: It is the amount received by the concerned as per the “will” of the donor. It appears in the receipts side of receipt & payment account. It should not be considered as income but should be treated as capital receipt i.e. credited to the capital fund account.

Donations: Amount received from any source by way of gift is described as donations. It appears on the receipts side of receipt & payment account. Donations are usually credited to income. Rules of the association may provide that a part of donations are to be treated as capital.

Subscriptions: The members of the association, as per rules, all generally required making annual subscription to a neighbor it to serve the purpose for which it was created. It appears on the receipts side of receipt & payment account, and is usually credited to income.

Life membership fee: As “life” member ship fee is a substitute for annual membership fee. Therefore, it is desirable that life membership fee should be credited to a separate fund and fair proportion be credited to the income in subsequent years.

Entrance fees: This is also an item to be found on the receipt sides of receipt & payment account. There are arguments that it should be treated as capital receipt because entrance fees are to be paid by every member only once (when enrolled as member).

Sales of Newspaper, Periodical etc.: As the old newspapers, magazines and periodical etc. are to be disposed off every year, the receipts on account of such sale should be treated

as income and therefore, to be credited to income and expenditure account.

Capital Fund: Any concern whether profit seeking or non-profit seeking requires money for convicting day to day functions in the case of profit seeking concerns such money is called “capital”, while in case of non-profit seeking concerns it is called “capital fund”. Capital fund is created with surplus revenue and capital receipts and income. It is shown on liabilities side of a balance sheet.

Practical Study of Organization

Kashf Foundation

Introduction

Kashf Foundation is a specialized microfinance institution (MFI) providing credit, savings, micro-insurance and social advocacy support to households that have no prior access to formal financial services. The Kashf model is predicated on reaching out to households below or at the poverty line, through women focused and women friendly financial products in both urban and semi rural communities. In other words, the centerpiece of Kashf’s methodology is the alleviation of poverty by greater investment in gender empowerment. Currently, Kashf is one of the few microfinance institutions in Pakistan that exclusively focuses on women.

Kashf began as an action research programme in 1996 with support from the prestigious Grameen Bank. The initial two years were spent in understanding the market and the needs of clients in peri-urban and urban settings. The importance of standardized products, systems and policies, the simplification of procedures and reporting requirements, along with the significance of focusing on client satisfaction and developing clear cut financial performance indicators was highlighted.

Mission Statement

…..is to alleviate poverty by providing quality and cost effective microfinance services to low income households, especially women in order to enhance their economic role and decision-making capacity.

A study was conducted to determine the effect of microfinance on the productivity of the businesses of Kashf’s clients and their ability to service their loans. The study showed that not only does microfinance increase the productivity of the businesses in the short run it also enhances business sustainability in the medium run by helping generate higher returns. The table below shows the eight most popular businesses of Kashf clients and their net profit margins, excluding all loan payments.

Table 1

Kashf’ clients 8 most popular Businesses.

Sr.No Type of Business Net Profit Margin

1 Plastic Molding 51%

2 Running Grocery Shop 48%

3 Vegetable and Fruit selling 45%

4 Shoe Making 41%

5 Tailoring 35%

6 Hand Embroidery 22%

7 Running Beauty Parlors 13%

8 Artificial Jewelry Making 11%

Kashf’s Methodology

Like other Grameen-style replications, Kashf Foundation offers collateral-free loans and strives toward the empowerment of women through the creation of peer groups. The process of selecting beneficiaries at the grassroots level is done by the clients who are assisted by loan officers, after a process of door to door mobilization has been completed.

Once members are selected according to strict poverty criteria, centers of 20-25 members are formed. The members are given a loan on the basis of their absorptive capacity. In the absence of any physical collateral, the recovery is based on the premise that each member will be responsible for the other in case of emergency or non-payment. Repayment installments, their amounts and dates of recovery are pre-ascertained and group members are informed of all relevant details at the beginning of the loan disbursement. In addition, 1 centre manager and 4-5 group leaders within each centre ensure discipline and information dissemination by forming a credit committee.

Kashf’s Services

Table 2

Product Purpose Range Terms

Loans

General LoanIncome Generation

Rs 10,000

to

35,000

Service charge:20% Loan Term: 1 year

Repaid: Bi-monthly

Emergency Loan

Consumption or for any other emergency including payment of school fees or utility bills

Rs 4,000

Service charge:20%

Loan Term: 6 months

Repaid: Bi-monthly

Business Surmaya Loan

Entrepreneurial Activities

Rs 40,000 to 100,000

Service Charge: 18%

Loan tem: 1 year

Repaid: Monthly

Savings

Voluntary Savings Voluntary Voluntary Voluntary deposit

Insurance

Life InsuranceCompulsory with the General Loan

Covers outstanding amount of

loans and a funeral payout

1.5% of the Loan amount

Kashf’s clients

The bulk of Kashf’s clients are women from low income households with an average per capita disposable income varying from US$0.55 toUS$0.9 per day, as can be seen in Figure 4. They manage 2-3 simple meals everyday for a family of seven people, comprising of five children. Most of the clients live in their own houses with a land area varying between 50 to 125 square yards.

Income distribution of Kashf Clients

Income Distribution

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

<3000 3000-5000

5000-9000

9000-15000

>15000

Income in Rupees

Income Level

The above income distribution of clients reveals that the largest percentage of the clientele fall in the Rs. 5,000-9,000 income bracket i.e. US $ 83 to US $ 150 per month. In other words, 40% of Kashf’s clientele are spending $ 0.55 per day per head while 14% of Kashf’s clientele spend $0.3 per day per head for daily family needs1. Furthermore, 35% of the clientele are spending US $ 0.9 per day per head, and only 11% spend more than US$ 1 per day per head, implying 89% of Kashf’s households are within the $1/day poverty level. It must also be mentioned that these statistics fail to reflect the seasonality and vulnerability of these income sources, which further exacerbates the economic insecurity of such households.

1 Formula: Average of the two income level divided by 30 (days) further divided by 7(number of stove sharers) to give an income equivalent of per day per head.

Education level of Clients

Level Of Education

62%17%

18%

3%

illiterate upto primary

primary to metric upto inter

Additionally, only 38% of the clients are literate as can be seen in the figure above. Their houses are sparsely furnished while electricity and piped, potable water are available in most cases. Most of the urban clients live in homes with closed sewerage systems inside the house and open drains outside, amplifying environmental health related factors. Almost all of the clients suffer from back aches, blood pressure and, in older women, diabetes. Health service facilities near the homes only provide relief from minor ailments such as cold, cough and fever, whilst treatments for major diseases such as hepatitis, gastroentitis, typhoid are expensive and out of reach.

Case Study:

Mr. Shahbar, a customer applied for a loan of Rs. 100,000. After scrutinized the document, the management decided to grant loan. The current market rate at that time (in 1996) was 14.77% but loan was provided at 7% P.A in the following manner. If I was working as assistant account I will mange the matter as:

I shall first find total amount receivable by using Annually Formula which is:

01-01-1996 Mr. shaban 100,000

Bank 10,000

Loan issue to Mr. Shabar & Payment made by bank.

31-12-1996

Bank 14,237.75

Mr.Shaban 7237.75

Interest Income 70,000

1st installment received

31-12-1996

Interst income 7000

P/L A/C 7,000

Intrest charged to P/L and A/C

31-12-1997

Bank 14237.75

So he will have to pay Rs. 14237.75 per annum to wave off the loan.

So total amount receivable is w-2

Out intrest income over ten year is 42377.5 which is computed as follows

w-3

I segregate the intrest income and repayment of load with the help of schedule (w-4) and pan the entries with necessary accounts alongwith slected figures in P/L S/c and Balance Sheet as”

Conclusions & Recommendations

SWOT Analysis of Kashf

Strengths:

Apna TV is Pakistan’s first Punjabi infotainment Channel. Strong Representative of Punjab and Punjabi Culture. Emphasize on development of Punjabi Language. High viewer ship in inner Punjab.

Weakness:

Due to Punjabi Language their viewer ship is limited.

Opportunities:

Being First Punjabi Infotainment channel, they can create more loyal viewers. The problems of various inner Punjab cities and villages can be highlighted to

media.

Threats:

In, near future, there will be a strong competition among Punjabi channels as new Punjabi channels are being launched.

Due to new channels, the expertise of Apna TV is continuously transferring in other channels.

Recommendations for Kashf

It should produce more programs on social awareness It must introduce the programs for children. It must increase its investing capacity and cash financing.

Conclusion:

No doubt Apna TV is a leading channel of Pakistan. It has no major competitor among regional channels. It maintains its leadership position in the market as far as advertisements are concerned. But stile it is on alarming thing. That is has to compete in the international media. Where bulk of competition among channels are available at every step. Thus is has to cover its weakness and gets the maximum benefits from its available opportunities.