Anita Johnson Was Preparing The Adjusting Entries For Her Bu

Anita Johnson Was Preparing The Adjusting Entries For Her Business In

Anita Johnson was preparing the adjusting entries for her business in preparation for the adjusted trial balance and financial statements. She planned to present these financial statements to her banker to obtain a line of credit. As she was reviewing the salaries earned for the last three days of the month and reasoned that if she did not accrue this expense, her net income would be higher and her current liabilities would be lower. She also believed that these salaries would be recorded next month when they were paid, so she thought it did not matter if she did not record them in the current month. Is Anita acting unethically? Why or why not? Who will be affected by her decision? Is this a simple matter of timing or is more at stake?

Paper For Above instruction

The scenario involving Anita Johnson's preparation of adjusting entries highlights an important ethical dilemma rooted in financial reporting integrity. Adjusting entries are critical for ensuring that financial statements accurately reflect a company's financial position at the end of an accounting period. Failing to record accrued expenses such as salaries earned but not yet paid constitutes a form of financial misrepresentation, which extends beyond mere timing issues.

Understanding the Role of Adjusting Entries

Adjusting entries serve to update account balances before financial statements are prepared. They ensure that revenues and expenses are recognized in the period they are incurred, adhering to the matching principle and accrual basis accounting. In this context, salaries earned by employees for the last three days of the month represent an expense that has been incurred but not yet paid. According to Generally Accepted Accounting Principles (GAAP), these expenses should be accrued to provide an accurate picture of financial performance and position.

The Ethical Implications

Anita’s decision to omit recording these salaries as an expense in the current period is ethically questionable. By intentionally not accruing the salaries, she would be inflating net income and underreporting liabilities. This misrepresentation can be classified as financial statement manipulation, which violates ethical standards and accounting principles. Ethical standards in accounting, such as those outlined by the American Institute of Certified Public Accountants (AICPA), emphasize honesty, integrity, and objectivity. Concealing unpaid expenses compromises these principles.

Who Will Be Affected?

Several stakeholders are impacted by Anita's decision. First, her business's management and owners rely on accurate financial statements to make informed decisions regarding operations and financing. Second, her bank or lenders, who will review the financials when considering the line of credit, depend on truthful reporting to assess creditworthiness. Third, external users such as investors, suppliers, and regulators rely on financial statements for transparency. Misstating liabilities and net income can lead to misinformed decisions, potentially resulting in financial losses or legal consequences for the company and Anita personally.

Timing vs. Ethical Responsibility

While timing issues are common in accounting, they should not justify intentional misstatements. Recognizing expenses when incurred is fundamental to ethical accounting practice. The notion that recording salaries in the subsequent period is acceptable because they "will be paid next month" overlooks the accrual principle that expenses must be recognized in the period in which they are incurred, not when paid. Deliberately delaying or omitting such entries constitutes a breach of ethical standards and could be legally scrutinized as financial misrepresentation.

Broader Consequences and Professional Standards

Rectifying such misstatements is critical to maintain financial integrity and credibility. Falsifying or delaying expense recognition can lead to audit problems, regulatory sanctions, and damage to professional reputation. Accountants and business owners are entrusted with safeguarding the accuracy of financial reports, and neglecting this duty not only affects external stakeholders but also erodes trust within the organization. Professional codes of ethics, such as those from the International Ethics Standards Board for Accountants (IESBA), underline the obligation to report truthfully and avoid misleading financial information.

Conclusion

In conclusion, Anita Johnson's decision to omit accruing the last three days' salaries is unethical because it involves intentionally misrepresenting the financial statements. The act influences multiple stakeholders, including her business, lenders, investors, and regulatory bodies. While timing might seem like a minor issue, adhering to ethical standards and accounting principles emphasizes that all expenses incurred within a period must be recognized. More at stake than mere timing, such actions can compromise the integrity of financial reporting, damage professional reputation, and have legal repercussions. It is essential for accountants and business owners to prioritize transparency and ethical conduct over short-term financial appearances to uphold trust in financial reporting systems.

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