Question

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?

Answer 1

1) As per the accrual concept in accounting, an expense should be recorded when it is incurred. The VIP order is to be completed today. Thus, the expense is incurred in this fiscal year. Thus, the expense should be recorded and the check should be written today.

2) If the check is written and the invoice ends up being erroneous, there will be an overstatement of expenses for the current financial year. This will result in an understatement of profit which could mislead investors. Further, it could be n audit point when documentation is checked by the auditor.