Due Thursday On The Last Day Of The Fiscal Year A Co-Worker ✓ Solved

Due Thursdayon The Last Day Of The Fiscal Year A Co Worker Asks You T

Due Thursday On the last day of the fiscal year, a co-worker asks you to cut a check for $2,000 as a miscellaneous expense for supplies in order to complete a project for a VIP customer today. You notice the invoice looks a little different from other invoices that are usually processed. You know that by preparing the closing entries tomorrow, the miscellaneous expense will be set to zero for the beginning of the year. Should you write this check today and record the expense or write the check tomorrow? How would the company be affected if the check is written and the invoice ends up being erroneous? What are the four closing journal entries? Why are these necessary?

Sample Paper For Above instruction

Financial accounting practices require meticulous attention to timing and accuracy, especially at the end of a fiscal year when closing entries significantly affect the company's financial statements. When a co-worker requests a check for $2,000 as a miscellaneous expense on the last day of the fiscal year, the decision to record the expense immediately or defer it to the next day involves understanding the principles of accrual accounting, materiality, and the implications of erroneous invoices. Additionally, understanding the purpose of closing journal entries is crucial for maintaining accurate financial records and preparing the company's books for the upcoming fiscal period.

Recording Expenses and the Timing of Transactions

In accrual accounting, expenses should be recognized when incurred, regardless of when payment is made. Given that the invoice appears unusual, it is essential to verify its legitimacy before recording the expense. If the invoice is legitimate, recording the $2,000 expense today ensures that the financial statements reflect the expenses that pertain to the current fiscal year, aligning with the matching principle. This approach provides an accurate representation of expenses incurred and profits earned in the fiscal year. Conversely, delaying the recording until tomorrow might cause the expense to be understated in the current period, leading to inflated profits.

Potential Impact of Erroneous Invoices

If the invoice is erroneous and the check is written based on a potentially fraudulent or incorrect invoice, the company's financial statements could be materially misstated. This includes overstating expenses or liabilities, which can mislead stakeholders and distort the true financial health of the organization. Paying an incorrect invoice could also lead to legal or ethical issues, especially if the invoice is part of fraudulent activity. Therefore, verifying the invoice's authenticity before processing the payment is crucial, particularly on the critical last day of the fiscal year, when the company aims to present accurate financial results.

The Four Closing Journal Entries

The four primary closing journal entries are designed to transfer temporary account balances to retained earnings, resetting the temporary accounts for the new fiscal year. These entries include:

1. Closing Revenue Accounts: Debit each revenue account for its balance and credit Income Summary.
2. Closing Expense Accounts: Credit each expense account for its balance and debit Income Summary.
3. Closing Income Summary: Transfer the net income or loss from Income Summary to Retained Earnings by debiting or crediting Income Summary and doing the opposite to Retained Earnings.
4. Closing Dividends (or Drawings): Debit Retained Earnings and credit Dividends or Drawings account to close dividends out of the books.

These closing entries are necessary to prepare the company's accounting records for the new fiscal period by resetting the temporary accounts and updating the retained earnings account to reflect the company's accumulated net income or loss.

Significance of Closing Entries

Closing journal entries are fundamental for maintaining the integrity and clarity of financial reporting. By clearing temporary account balances, the company ensures that income, expenses, and dividends are accurately recorded for each fiscal period, preventing carryover errors that could distort financial analysis. They also support the audit process and facilitate accurate financial statement preparation, providing stakeholders with transparent insights into the company's performance.

Conclusion

In conclusion, when faced with a last-day request for an expense, it is prudent to verify the invoice before recording the expense to avoid potential misstatements or fraud. Recording expenses promptly in accordance with accounting principles ensures accurate financial statements. Understanding the purpose and process of closing journal entries underscores their importance in maintaining proper accounting cycles, safeguarding the integrity of financial reporting, and preparing the organization for the next fiscal period. Proper closing procedures uphold compliance and provide a clear financial snapshot of the company's performance.

References

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