Service Cost Flows
Response to the following problem:
The CPA firm you work for has just been hired by Phillips Attorneys at Law to perform an audit. In the process of the audit, you notice that Phillips' accountant has been inconsistent in accounting for the company president's salary. You notice that sometimes he has accounted for the company president's salary as follows
Overhead.................................................20,000
Salaries & Wages Payable.............................................20,000
To record the company president's salary.
Other times, the accountant has debited Salaries and Wages Expense instead of Overhead. When you confront the accountant about the inconsistency, he gets somewhat defensive and says that it doesn't matter which method is used because both methods result in an expense, and net income will be the same either way.
1. Assuming that the company president's tasks are exclusively administrative, do you agree with the accountant? Why or why not?
2. Which journal entry is correct? Why?