EZEKIEL ENTERPRISES

A business case Presented to the Accountancy Department De La Salle University

In partial fulfillment Of the course requirements In ACTBAS1 K32

Francisco, Frank Richard G. February 17, 2011

First of all, Sebastian Caleb, the accountant for Ezekiel Enterprises, made risky and last minute estimations for the expenses of said company due to pressure

and lack of time with which he could have taken other modes or courses of action with respect to the Accrual Basis of Accounting.

In support of this, estimating the expenses to be less so as to not make the company look bad is unethical in its own way. According to the Conservatism concept, in cases of uncertainty, income must be recorded and presented as understatements rather than overstatements which contradicts to what Sebastian did, which by making the expenses less, this would then in turn record the income to be higher or as overstatements. That in itself is a mistake.

Sometimes, the simplest of actions can be of great depth and extent to which may actually deem to be of great course and of higher success in attaining such objectives in this situation. With that said, a simple course of action that would have been to get confirmation from the company president regarding the current situation curtailing him with respect to the lack of time and the needed assessment of expenses. In that sense, he ma have gotten opinions or suggestions from the client himself, for just simply estimating and making up elements in the financial statements would deem unethical and unhelpful in any way.

With that said, he may have also gotten more information or a complete background of all the needed information for there is a greater requirement to keep all source documents to help identify the timing and scope of revenues and expenses.

In line with that, the accrual basis of accounting surfaces and paves way to serve as a solution to problems such as these, although with this process, financial reports take longer to prepare due to the income/expense adjustments that need to be investigated, but may serve to be the current unadjusted financial report that may be given to the client with proper and respectful analysis of the companys financial position.

Accrual accounting is an accounting method that involves matching income with expenses, regardless of whether cash has been received or paid for any particular transaction. Accrual can be an accrued revenue or expense. Accrual accounting is different from cash accounting, which recognizes an expense or revenue only when the underlying monies are paid or received. Therefore, by gathering from the company president or the clients the needed information and documents, even from a short span of time with the accrual basis of accounting, he may have achieved his objectives in a simple yet trustworthy manner.

Figuring out the exact balance in any account affected by the operating cycle for a specific period is challenging. It would be nice if all the accounts receivable generated in a month were also collected within that month, but that is not realistic. Neither is buying just enough supplies to generate revenue for a specific month.

This is the basis of accrual accounting not every transaction can be completely accounted for within the period the transaction occurs.

The GAAP principles that explain why these types of transactions are not straightforward nor are they easily accounted for include the Revenue Recognition principle and the Matching principle.

Accrual accounting matches revenues with expenses for a particular period and this is the basis of the matching principle. Accrual accounting demands that expenses be matched with the revenue that was generated from those expenses. The expenses for a period, therefore, must include the portion of assets that was used up during the period. This matching is done so that the net income reported is as accurate as possible.

Many costs can be directly linked to the revenue they help produce. Likewise, the cost of inventory delivered to a customer should be expensed when the sale is recognized. This is what is meant by "associating cause and effect," and is most often referred to as the matching principle.

In the absence of a clear link between a cost and revenue item, other expense recognition schemes must be employed. Some costs benefit many In such cases,

periods. Stated differently, these costs "expire" over time.

accountants may use a systematic and rational allocation scheme to spread a portion of the total cost to each period of use.

Last, some costs cannot be linked to any production of revenue, and do not benefit future periods either. These costs are recognized immediately.

Therefore, with all those said, If I were in Sebastians position, I would have simply collected information from the client and the company president himself, and would have gotten permission as to what course of action I would be planning to take, which in this case would be the accrual basis of accounting.

This is due to the sole reason that with such a way, there are a lot of advantages, contrary to the simple and escaping way of estimating expenses so as to make the company look better due to lack of time and means. Advantages of the Accrual basis of Accounting are such that it gives a truer and fairer representation of the financial position and performance of the business. Also, we need not be scared for it complies with both tax law and accounting standard requirements. The financial reports also have more credibility with financial institutions and investors. And it is a reliable financial analysis and decision making tool which can make valid comparisons with prior periods.