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College Accounting (Book Only): A ...

13th Edition
Scott + 1 other
ISBN: 9781337280570

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BuyFindarrow_forward

College Accounting (Book Only): A ...

13th Edition
Scott + 1 other
ISBN: 9781337280570
Textbook Problem

Your client is preparing financial statements to show the bank. You know that he has incurred a refrigeration repair expense during the month, but you see no such expense on the books. When you question the client, he tells you that he has not yet paid the $1,255 bill. Your client is on the accrual basis of accounting. He does not want the refrigeration repair expense on the books as of the end of the month because he wants his profits to look good for the bank. Is your client behaving ethically by suggesting that the refrigeration repair expense not be booked until the $1,255 is paid? Are you behaving ethically if you agree to the client’s request? What principle is involved here?

To determine

Indicate the accounting principle that is involved in recording accrued repair expense.

Explanation

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and owners’ or stockholders’ equity) to maintain the records according to accrual basis principle and matching concept.

Matching principle: This accounting principle states that a company should recognize expenses in the same period those expenses are incurred to earn revenues, if expenses are not paid but incurred and revenue is earned but not received. This principle represents to recording either an expense or revenue which does not involve cash. Accrued expense is the expense incurred but not yet paid. Accrued revenue is the revenue earned but cash is not received...

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