Jane 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 don't agree that it doesn't matter where the transaction is recorded. The recording of transactions in the proper accounts is crucial for accurate financial reporting. If a transaction is recorded in the wrong account, it can distort the financial statements and misrepresent the company's financial position. In this case, recording legal fees as dividends would not accurately reflect the nature of the expense and could potentially mislead investors, creditors, and other stakeholders.

The matching principle is affected by Jane's decision because it violates the concept of matching expenses with related revenues in the same accounting period. By recording legal fees as dividends, Jane is not properly matching the expense with the revenues it helped generate. This can result in an inaccurate representation of the net income and could potentially mislead users of financial statements.

Even if Jane owns all of the stock of Creative Marketing, she still has an ethical responsibility to record each business transaction properly. As an accountant, it is her duty to provide accurate and reliable financial information to stakeholders, including the bank in this case. Properly recording transactions is a fundamental ethical principle in accounting and serves to promote transparency, accountability, and trust in financial reporting. Failing to do so could lead to legal and reputational consequences for Jane and the company.