Jamie Hanson was recording the daily transactions of Alpine Physical Therapy, Inc., into the accounting records so she could prepare financial statements and apply for a bank loan. Some of the business expenses were higher than she had expected, and Jamie was worried about the effect of these expenses on net income. Jamie was recording a $5,000 payment for legal fees incurred by the business by debiting Legal Expense and crediting Cash to properly record the journal entry. She then thought that, rather than debiting the expense account for the $5,000 payment, she could debit the Dividends account, which also had a normal debit balance. Jamie knew that debits had to equal credits so debiting the Dividends account instead of the Legal Expense account would not affect the trial balance. Further, the net income would be $5,000 higher because now no legal expense would be recorded. She thought that either way the retained earnings would be lower, and besides, it really didn’t matter how the $5,000 payment was shown as long as she showed it somewhere.
Should Jamie debit the Dividends account rather than the Legal Expense account? Do you agree with her thought that it really doesn’t matter how the $5,000 payment is shown as long as it is shown somewhere? Considering that Jamie owns all of the Alpine Physical Therapy, Inc., common stock, does she have any ethical responsibilities to properly record each business transaction?

  • CreatedApril 29, 2014
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