Question

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?

Answer 1

cash Basis of yccounting in this type of Accounting only the transaction invorning actual cash inflow of cultow are recorded, Best not any other type of transaction Such as Credit Saus og purchases etc... I Accural Basis of Accounting & In accuriae Based accounting every transaction invouding economic nature will be recorded & the Books of accounts, Whether actual cash recented or not. In the present Senario a JOB woook wooo done at the end of year in Decombes which result into income in the cent year of January. Cash Basis of accounting will not consides Such transactions since actual cash loads not gecended - Accoral accounting whl Consides these transactions Hence resulting sellenue as follour * Total Revenue $75000 Total Pule $95000 (+) Corud Income $ 20000 (-) ACC EXP O Tobu Rear.92500 Totae relleme $90000 It is Ethicae getting Loan By following Accred S8816 - Accounting