Question

Jilian Carter was preparing the adjusting journal entries for Jilian’s Java, a business that uses accrual accounting, in order to prepare an adjusted trial balance and financial statements. She knew that $610 of salaries related to the current accounting period had accrued but wouldn’t be paid until the next period. Jilian thought that simply not including the adjustment for these salaries would mean that salaries expense would be lower and reported net income would be higher than it would have been had she made the adjustment. Further, she knew that the Salaries Payable account would be zero, so the liabilities reported on the balance sheet would be less and her business would look even better. Besides, she reasoned that these salaries would be reported eventually, so it was merely a matter of showing them in one period instead of another. Dismissing the reporting as just a timing issue, she ignored the adjustment for the additional salaries expense. Is Jilian acting unethically by failing to record the adjustment for accrued salaries? Does it matter that, shortly into the new accounting period, the salaries will ultimately be paid? Is it really simply a matter of timing? What are the potential problems of failing to include all the adjusting journal entries?

Answer 1

According to Accrual Basis of Accounting,Revenues and costs are recognized as when they are earned or incurred (and not as money is received or Paid) and recorded in the financial statements of the periods to which they relates.

Benefits of Accrual System of Accounting :-

1. Its Provide true and fair view of Financial statements.

2. Its provide better Picture of Financial Performance of Organisation.

3. Its provide Better Analysis of Finance Statements as there is track when any expense was incurred and when any revenue was generated.

Jilian Carter should consider salary expense while preparing Financial statements.Non consideration of same will not provide true and fair view of Finance statement.

Problems that would be arises due to jalian carter's wrong treatment are as follows :-

1. Profit of current year will be higher than what it should be.

2. Laibility on the end of current year will be lesser than what it should be.

3.Profit of next year will be lesser than what it should be.