Module $4$: A ccruals and Deferrals

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Jared Jones has started a screen printing business. Because he is a private company he has chosen not to use accrual based on accounting. In January of $2017$ he decides to go to the bank and ask for a loan to finance the purchase of a large piece of machinery. He is able to show the bank a net income of $$75,000$ for the year ending December $31,2016.$ Based on his income, and debt to asset ratio the bank is unable to give him the loan.

Jared goes back to the office and instructs his accountant to re$-$do the financial statements. This time using accrual basis accounting. The accountant adds an additional $$20,000$ of revenue and net income for a job that was performed at the end of December, and expected to be paid in January. He also includes $$20,000$ on the balance sheet for accounts receivable, and $$2,500$ in accrued expenses. With this new information Jared is able to get his loan.

Was it ethical for Jared to include the $$20,000$ in his net income? Why or why not?

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