Question

You are a young ambitious accountant working for ABS Corp. At the end of the financial year shortly after your appointment the president of ABS, who is a friend of your father, instructs you; (a).not to record accrued wage expenses until next year "because they won't be paid until then'and; (b) to record in this year's sales an order that will not be delivered until next year "because the customer placed the order this year'. ABS would report a net income instead of a net loss if these instructions were carried out. Using the guidelines provided in our course textbook (extract below) analyze the situati and explain what you would do.

Answer 1

As per Accounting Principle , Record of transaction in books of accounts should be on "Accrual Basis".

i.e : Financial statements are prepared under the Accruals Concept of accounting which requires that income and expense must be recognized in the accounting periods to which they relate rather than on cash basis.

in this case President of ABS corp is friend of accountant's father is not relavent. and should record of transaction in case;

(a) Wage expense is for the current year not for the next year, irrelevent of cash payment, so that wage expense is record in current year financial statement.

(b) in this situation, Actual Sale happen when ownership and risk transfer to customer, that mean order receive from the customer is not only proof of sale, and delivery of goods in next year is not cause of sales not record in current financial statement. here I assume that ownership and risk of goods are transfer to customer. Thus Sales should record in current year financial statement.