Explanation:
(1) Roy has changed the rates for prepaid rent. It is important to note that employ costs are investments and deferred rent is a current account of cash. Ideally the following paragraph should have been submitted by Roy: (I took the sum of $100 for the illustration) :
Account Debit Credit
Rental expenses $100
Cash $100
=> Yet Roy has passed this entry and has not passed the one above :
Account Debit Credit
Prepaid Rent $100
Cash $100
As we have seen, no leasing cost was shown in the firm's income statement when the first payment was not made. In other terms, the net income of the organisation was inflated falsely by $100. $100 will be included in the current account section as accrued rent in the deposits and charged as expenses in the income statement of the next year. The consequence of this journal entry is that the amount of net income is falsely raised by the number of payments shown as prepaid rentals.
(2) With the increase in log entries he will receive a higher premium this year as his payment is related to net income. Whoever lost all those stakeholders fails who depends on the financial statements of the organization to decide.
For example, banks would lose because they assume the financial position of the firm is much greater than its actual position.
(3) Roy's decisions can have far-reaching and important consequences for him. This is an accounting fraud case and therefore legal proceedings against both the administrator and the Director at the direction of whose accounts the crime is committed can be taken. It is very probable that the accountant will also be losing his job in the company and face actions by professional bodies such as ACCA, AICPA, etc. because he breaches the corporate ethical guideline and Code.
