Question

Accrual Accounting and Ethics Activity Chapter 4 You have just graduated from the local University and landed what you had thought was a great job as an accountant for Crazy House Interiors, an upscale design studio. Your apartment is wonderful and you have made a lot of new friends. However, you boss has just asked you to do him a favor." Crazy House is planning to ask one of the local banks for a loan. However, there is some concern because this year's revenues are considerably lower than the revenues of the previous year. One of the more talented designers has just landed a contract for a large, profitable project, Half of the fee for the project is to be collected when the contract is signed at the end of this week, with the remainder of the money due when the project is completed. Work will begin on the project when the contract is signed Your boss has asked you to record the initial payment of $125,000 as revenue at the time the money is received Not wanting to disappoint the boss, you originally agreed to record the transaction as he requested. However, you are having second thoughts about recording the transaction and your ethical responsibilities. What should you do? Why?

Answer 1

As per Accural Accounting system, Income and expense will me incured as and when incurred. But, in this case there was no function perform till now. Advance received at the time of signing of contract does not mean that you have earned income. its a only advance for completion of project. So, as an accountant, you should book advance payment and shown in balance sheet and revenue should not be booked.

Revenue will be booked only when you perform activity for such project. so as per ethical resposibility of an accountant, Advnace payment should be recorded and no revenue should be booked till completion of contract.