Business memo on accounting frauds
To: The Stanton Corporation president
From: Company’s Accountant
Date: (Your date)
How to account on the unearned revenue in books of account
According to Needles, Powers, & Crosson (2013), the unearned revenue should be recognized as revenue or income in the book of accounting in the year the services paid for has been felt by the client or the customers. After a proper consideration of your request to account the revenue of the differed revenue (unearned revenue) as income for 2016, I have concluded that this is against the principle of accounting for revenue recognition and could lead to fraudulent entry.
If you consider recognizing the differed revenue (unearned revenue) as revenue, it will lead to wrong entry. For instance, if the unearned revenue is recognized as the revenue in 2016, there will be an overstatement of the revenue account by $120,000. On the other hand, there will be the understatement of the revenue account of 2017 by $120,000. After overstatement of the revenue generated, the bonuses will rise, hence increasing the expenses account. On the other hand, understatement leads to decrease in bonuses hence; understating the expenses account; and later affecting the balance sheet.
Secondly, it could lead to material errors. As the shareholders depend on material entries, the shareholders may sue you due to the misleading information. Lobo & Zhao2013, states that the shareholders have right to sue the concerned person due to material errors that mislead their decision making.
In my conclusion, the corporation is not supposed to recognize unearned revenue as revenue due to the materiality of the error. any certified accounting officer is liable under the law for material errors in books of accounting.