Sample Case Study On Ethical Case
In the given case, the Maryam faces a dilemma due to the advice given by Mr. Rashid. The company has not taken a big amount into consideration and hence shown losses in the past. Due to this, the company has not been able to show adequate and correct amount of profits and revenue. Because the contract says that the company has to provide services from 2nd of Dec, the company is required to take the amount into consideration. The business needs to report the amount based on the date from which services are provided. The company should have recognized the amount immediately and should have represented it in their balance sheet. The requirement in the given case is to recognize it as a revenue and not as a journal entry. Recognition as revenue will mean that the profits will increase and since the company is already showing losses, it will not show profits. Ethical issues faced by the company are that appropriate recognition of revenue was not done which now needs to be reflected and the entry needs to be changed. It also shows that the standard of revenue recognition was not followed. Another dilemma faced is that if the company shows a profit during the year then it may be required to adhere to the tax requirements and comply to the laws as and where necessary. This could lead to payment of taxes for the company.
The alternative course of action could be recognition of revenue after the completion of the period of six months, that is, after the completion of the period of service as stipulated by Gulf Water Company. This could mean that the contract was recognized as receipt only after the service was successfully provided. Another alternative is to recognize the receipt over the period of six months, hence the total amount should be equally divided over the period of service and recognized proportionately. This will distribute the income into two financial years and its effect on the profit will not be highly significant. The amount will be reflected in parts.
I would advise Maryam to recognize the amount over a period of six months, that is over the total period of provision of services. This will ensure that the total amount is not shown as a revenue receipt and will not have any major effect on the financial statement or the profit of March. Proportionate recognition of revenue will ensure that the total amount is recognized proportionately and reflected in the financial statements.
Ethics are extremely important in the accounting profession. An accountant is required to follow ethics and maintain ethical standards in his work. Ethics like professionalism and efficiency need to be constantly maintained. Accounting is a profession where any mistake can lead to a huge amount of loss and can then affect a lot of people. Hence, following ethics will mean that accurate and true value is reflected in the financial statements and the stakeholders are provided with correct information.
Accounting ethical standards that should be followed by the accountant include professionalism, efficiency, independence and objectivity. The professional behavior and attitude reflects a lot about the accountant. The accountant should also maintain independence as well as objectivity in his work. His decisions should not be influenced by another person. Efficiency in the work shows his sincerity towards work as well as his respect for the profession he is in. The accountant should also follow technical standards issued by the Board and pertain to them. Confidentiality as well as integrity are also the main components of ethical standards. An accountant should not give away any information from one person to the other. Integrity towards the client as well as profession are highly important.
Mtweve, G. (n.d.). 25 Code of Ethics for Professional Accountants . Retrieved from Academia: http://www.academia.edu/4131740/25_Code_of_Ethics_for_Professional_Accountants_short_notes