Financial Statement to Bank

Your client is preparing financial statements to show the bank. You know that he has incurred a computer repair expense during the month, but you see no such expense on the books. When you question the client, he tells you that he has not received the official bill, although he knows the expense was $1,250. Your client is on the accrual basis of accounting. He does not want the computer repair expense on the books as of the end of the month because he wants his profits to look good for the bank. Is your client behaving ethically by suggesting that the computer repair expense not be booked until the official bill is presented? Are you behaving ethically if you go along with the client's request? What principle is involved here?

d.lawson
Profile Answers by d.lawson Questions by d.lawson
Nov 20th, 2008
9
5138

Questions by d.lawson

Accounting

Answer

Showing Answers 1 - 9 of 9 Answers

mholbert
Profile Answers by mholbert

Aug 8th, 2010

Well, actually, you cannot incur that bill until it has been paid. If he hasn't put out any money for it, then it should not have to be reported. I do not feel it is unethical. It should be ok. If he with-held the actual bill, that would be different. As long as he can fulfill his bank obligation it is fine too!

SANTOSH KANDEL

May 29th, 2012

As we are already aware about one of the concept of accounts i.e. prudence concept, which explains that all the expenses and losses which are to be held in near future should be recognized in advance and the income or profits in future shouldn't be recognized until it is realized. In this present case, since the client is following accrual basis, hence the financial statement should mention about the expense made for computer repair though the book does not show the expense held for the said purpose. Because, expenses are to be anticipated once incurred and hence it is immaterial that the bill is received or not.