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?

I do not agree that it doesn't matter where the transaction is recorded. It is important to record transactions accurately and in the appropriate accounts in order to present the financial statements fairly and accurately. Recording transactions in the wrong accounts can result in misleading financial statements and can impact decision-making by stakeholders.

The matching principle is affected by Jane's decision because it goes against the concept of matching expenses with revenues in the same period. By debiting dividends instead of recording the legal fees as an expense, Jane is not properly matching the expense with the period in which it was incurred. This can distort the financial statements' representation of the company's profitability and can lead to inaccurate assessments of the business's financial performance.

Even if Jane owns all the stock of Creative Marketing, she still has an ethical responsibility to record each business transaction properly. Ethical responsibilities are not determined by ownership but by the principles of accounting and professional integrity. As an accountant or bookkeeper, it is essential to adhere to these principles and maintain accurate records for the benefit of all stakeholders. Recording transactions properly ensures transparency and trust in financial reporting.