ane Doe of Creative Marketing was recording transactions into the accounting records to prepare financial statements for the bank in a loan application. Her expenses were higher than anticipated and she was concerned about the effects on net income. As she was recording $3,000 in legal fees she decided to debit dividends and credit cash. She reasoned this would have the same affect on retained earnings as the proper journal entry but would not affect net income and that it didn't matter anyway as long as the transaction was recorded somewhere.

Consider the proper journal entry that Jane should have made and answer the following:

Do you agree that it doesn't really matter where the transaction is recorded?
How is the matching principle affected by her decision?
As long as Jane owns all of the stock of Creative Marketing does she still have an ethical responsibility to record each business transaction properly?

No, I do not agree that it doesn't matter where the transaction is recorded. The proper recording of transactions is essential for accurately reporting financial statements. Incorrectly recording transactions can misrepresent the financial position and performance of a company, leading to misleading information for stakeholders.

Jane's decision to debit dividends and credit cash for recording legal fees is not in accordance with Generally Accepted Accounting Principles (GAAP). Dividends are distributions of profits to shareholders and are not expenses. Properly, legal fees should have been recorded by debiting an expense account (e.g., Legal Expenses) and crediting cash. This would reflect the accurate impact on net income and properly classify the expense.

Her decision affects the matching principle, which states that expenses should be recognized in the same period as the revenues they helped generate. By debiting dividends instead of recording a proper expense, Jane is incorrectly shifting the expense recognition from the period it occurred to retained earnings. This distorts the matching of expenses with the related revenues, violating the matching principle.

Even if Jane owns all the stock of Creative Marketing, she still has an ethical responsibility to record each business transaction properly. Accounting standards and principles exist to ensure transparency, accuracy, and reliability of financial information. Ethical responsibility requires adhering to these principles, accurately representing the financial position and performance of the company to stakeholders, including regulators, investors, and lenders.

I do not agree that it doesn't matter where the transaction is recorded. The location where a transaction is recorded in the accounting records is important because it affects the overall accuracy and reliability of the financial statements. Properly recording transactions in the correct accounts ensures that the financial statements provide a true and fair view of the company's financial performance and position.

The matching principle is affected by Jane's decision because it violates the principle of matching expenses with revenues in the same accounting period. By recording legal fees as dividends instead of as expenses, Jane is incorrectly reducing net income and distorting the matching of expenses with the revenues they generate.

Even if Jane owns all the stock of Creative Marketing, she still has an ethical responsibility to record each business transaction properly. As a professional and an officer of the company, she has a duty to provide accurate financial information to stakeholders, including the bank in this loan application. Failing to record transactions properly can mislead stakeholders and is a breach of ethical standards.