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?
Do you agree that it doesn't really matter where the transaction is recorded?
No, I do not agree that it doesn't matter where the transaction is recorded. The accuracy and proper recording of transactions are essential for maintaining the integrity of financial statements. Transactions need to be recorded in their appropriate accounts to provide a true and fair representation of the company's financial position and performance. Incorrectly recording transactions can lead to misleading financial statements and can have legal and regulatory implications.
How is the matching principle affected by her decision?
The matching principle is a fundamental concept in accounting that requires expenses to be recognized in the same period as the corresponding revenue they helped generate. By misclassifying legal fees as dividends, Jane would be incorrectly reducing retained earnings, which will ultimately affect the matching principle. The matching principle ensures that revenue and expenses are accurately matched to provide an accurate measure of a company's profitability. Misclassifying expenses can distort the matching of revenues and expenses and result in an inaccurate representation of the company's financial performance.
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?
Yes, even if Jane owns all of the stock of Creative Marketing, she still has an ethical responsibility to record each business transaction properly. Ethical responsibilities in accounting include providing accurate and reliable information to stakeholders and adhering to accounting standards and principles. Recording transactions accurately and in accordance with accounting guidelines is crucial for maintaining financial transparency and enabling informed decision-making by investors, lenders, and other users of financial statements. Failure to fulfill these ethical responsibilities can lead to legal and professional consequences.