Non-Profit-Making Accounting Adjustments
Non-Profit-Making Accounting Adjustments
Key Concepts
- Non-profit-making accounting adjustments refer to the procedures used to prepare the financial statements of a non-profit organisation. These adjustments help to present an accurate picture of the organization’s financial health.
Key Adjustments
- Prepayments: Expenses paid in advance need to be adjusted at the end of the accounting period. This ensures that the financial statements only show costs relevant to the specific period.
- Accruals: Costs that have been incurred but not yet paid for are accounted for in the current accounting period.
- Depreciation: The cost of tangible assets (such as machinery or equipment) is spread over their expected useful life.
- Bad Debts: Any amount owed to the non-profit-making organisation that is unlikely to be paid needs to be written off as a bad debt.
- Provision for Doubtful Debts: This provision is set aside for any debts that may not be recovered in the future.
Purpose of Adjustments
- Reflect True Financial Position: Adjustments help accurately demonstrate an organisation’s financial position by matching revenues with the related expenses.
- Ensure Compliance: Adjustments also ensure financial statements comply with accounting standards and principles which require expenses to be reported in the period they are incurred.
- Enhance Comparability: Through these adjustments, the financial statements of different periods can be compared, allowing for more informed decision-making and planning.
Limitations of Adjustments
- Requires Estimates: Some adjustments, such as depreciation and provision for doubtful debts, require making estimates, which can introduce subjectivity.
- Potential Manipulation: Although adjustments enhance financial accuracy, they can be manipulated, potentially misrepresenting the financial health of the organization. Regular audits are therefore essential.