Such accounting practices that are required to follow the law and regulations but intend to deviate what exactly is the point of accomplishment by the set standards is known as creative accounting. It focuses on the image of the company to present in a better way by covering the loopholes and that might include false portraying.
Several people take this process as illegal, but that is not the case and creative accounting is completely legal. The loopholes are covered but it ensures to avoid wrong practices in accounting for the future.
Before we indulge in further discussion for a better understanding, it is important that we have a look at the points of discussion in this article. This includes the following:
- Creative Accounting – How Does It Work?
- Types of Creative Accounting
- The Bottom Line
Creative Accounting – How Does It Work?
In the business world, there is a ritual of public accounting statements that helps investors to observe the financial health of the company and get a clear idea about the comparing and competing companies. Moreover, companies when experiencing creative accounting, tend to distort the financial information provided for the public.
Furthermore, the goal of creative accounting is to set an image of the company that makes it look good and successful in business. For this purpose, many loopholes are covered in a false manner as well. Twisting the truth is one of the tricks to make it happen right in the market. The gay area in accounting is covered so perfectly which can actually mislead the investors and they will not have an idea about the business shortcomings.
This is further important to know that if you get caught on this can spoil the image of the company in an instant and overnight. However, the companies still like to take the risk in order to have a good image in the market.
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Types of Creative Accounting:
The risk factor that is involved in creative accounting can vary in its nature. There are several techniques involved in this regard, some of them are discussed below:
- Inventory Manipulation
- Delaying Expenses
- Lowering Depreciation Charges
- Overestimation of Revenues
If we discuss the inventory in simple words, it is something that depicts the value of the manufactured products that are not up for selling yet. To create an artificial higher net income, overstating the inventory value of sold products will be done.
One of the main tricks is to defer in the records that show the expenses of the current period. Supplier payment and rent are such expenses that fall into this category. This trick is used to make the earning of the current period look better in the records.
Lowering Depreciation Charges:
Asset cost is usually spread out by the companies in this process. This can help to reduce the annual charges as well as assume salvage value will be increased.
Overestimation of Revenues:
This is one of the most used tricks by public companies. This helps to the income artificially. Revenue recognition can further help the companies to foresee the sales of the products or the service provided by them. Which makes exploitation happen to have a better image of the company in the market.
The Bottom Line:
Now that you have developed a better understanding of creative accounting, we can sum up the discussion by saying that it is not very easy to identify the questionable accounting practices that companies do trickily to ensure their better image in the market. Although this helps to boost the image and business to a certain level, however, serious consequences might come your way if you are caught.
Before you decide to go for any such practice, always involve a professional in order to ensure seamless working and avoid trouble in the process. We hope this article helped to develop a better understanding.
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Disclaimer: This article intends to provide general information based on creative accounting, how it works and the relevant types.