Case 1. Lynne Jamison was recording the daily transactions of Liberty Physical Therapy, Inc., into the accounting records so she could prepare financial statements and apply for a bank loan. Some of the business expenses were higher than she expected, and Lynne was worried about the effect of these expenses on net income. Lynne was recording a $3,800 payment for legal fees incurred by the business by debiting Legal Expense and crediting Cash to properly record the journal entry. She then thought that, rather than debiting the expense account for the $3,800 payment, she could debit the Dividends account, which also had a normal debit balance. Lynne knew that debits had to equal credits, so debiting the Dividends account instead of the Le- gal Expense account would not affect the trial balance. Further, the net income would be $3,800 higher because now no legal expense would be recorded. She thought that either way the retained earnings would be lower, and besides, it really didnt matter how the $3,800 payment was shown as long as she showed it somewhere.

Should Lynne debit the Dividends account rather than the Legal Expense account? Do you agree with her that it really doesnt matter how the $3,800 payment is shown, as long as it is shown somewhere? Considering that Lynne owns all of the Liberty Physical Therapy, Inc., com- mon stock, does she have any ethical responsibilities to properly record each business transaction?