You are controller for an architectural firm whose accounting year ends on Decem

Question

You are controller for an architectural firm whose accounting year ends on December 21.
As par of the management team, you receive a year-end bonus directly related to the firm's
earnings for the year. One of your duties is to review the transactions recorded by the bookkeepers.
A new bookkeeper recorded the receipt of $10,000 in cash as an increase in cash and an increase
in service revenue. The $10,000 is a deposit and the bookkeeper explains to you that the firm plans to
provide the services to the client in March of the following year.

1. Did the bookkeeper correctly record the client's deposit? Explain your answer.

2. What would you do as controller for the firm? Do you have a responsibility to do anything to
correct the books? Explain your answer.

Explanation / Answer

1. No, the bookkeeper did not correctly record the client’s deposit. Because the amount received from the client is a deposit for work to be done next year, it represents a liability at the end of the year rather than revenue. The bookkeeper should have increased the Unearned Revenue account. 2. As controller for the firm, you are responsible for the accuracy and fairness of the financial statements. You do have a moral and ethical responsibility to correct the books, even though in so doing the income for the year will be reduced. A reduction in the reported income will affect your year-end bonus, but you have a responsibility on your part to the users of the financial statements that supersedes any concerns over your personal financial situation.

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