Julie Watts of Watts Cooking was recording transactions into the accounting records to prepare financial statements for the bank in a loan application. Her expenses were higher than anticipated, and she was concerned about the effects on net income. As she was recording $5,000 in legal fees, she decided to debit dividends and credit cash. She reasoned this would have the same effect on retained earnings as the proper journal entry but would not affect net income and that it didn’t matter anyway as long as the transaction was recorded somewhere.
Consider the proper journal entry that Jane should have made and answer the following:
What should the journal entry have actually been? Include this in proper form in your post.
Do you agree that it doesn’t really matter where the transaction is recorded? Is the impact on retained earnings truly the same regardless of which entry is used?
Is there an impact on the income statement, balance sheet, or statement of retained earnings because of this decision? If so, what is the impact?
How is the matching principle affected by her decision?
As long as Julie owns all of the stock of Watts Cooking, does she still have an ethical responsibility to record each business transaction properly? Why or why not?
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