Question

In: Accounting

On the last day of the fiscal year, a co-worker asks you to cut a check...

On the last day of the fiscal year, a co-worker asks you to cut a check for $2,000 as a miscellaneous expense for supplies in order to complete a project for a VIP customer today. You notice the invoice looks a little different from other invoices that are usually processed. You know that by preparing the closing entries tomorrow, the miscellaneous expense will be set to zero for the beginning of the year.

Respond to the following in a minimum of 175 words:

  • Should you write this check today and record the expense or write the check tomorrow?
  • How would the company be affected if the check is written and the invoice ends up being erroneous?

Solutions

Expert Solution

Explanation :
First of all, the accountant should follow the internal control procedure laid down to ensure that the invoice being presented to him is issued by authentic suppliers and examine that it has been passed and cross checked by appropriate authority for payment.
To prevent any fake or incorrect payment.
  

And, as per the accounting rule of double entry system, when one account is debited then another account should also be credited simultaneously related for the same transaction.

In the given situation, the day when co-worker asks to cut a check of dollar 2000 as a miscellaneous expense to fulfill a VIP customer supply is the last day of the current year and the closing entry will be passed thereafter.

So, there will occur to situation:

1. If the cheque is cut today and recorded in books tomorrow. Then the bank account will be credited in current year and expenses will be charged in next year the result of recording transaction in such manner will affect the financial statement of both the year

  • the cash balance of current year will be recorded less as there is no expense charged in current year.
  • the profit of next year will be charged extra expense and profit of next year will be understated.

2. If the cheque is written tomorrow, then expense incurred in current year is charged to next year. such entry is also incorrect, as it will understate cash and profit of next year.


Therefore, correct accounting treatment is to record the expense and cut the cheque today itself in current year.

If the cheque written by the entity ends up to be erroneous then,

  • the payment made will prove to be lost and incorrect entries passed in the current year .
  • Also, the organisation can take step to recover the paid amount.

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