Creative Accounting : Creative Accounting A form of accounting which even while complying with all rules and regulations of accounting, nevertheless gives a biased information about company’s performance
Creative accounting involves using flexibility within accounting to manage the measurement and presentation of the account to serve the interest of the people who prepare the account rather than for whom the accounts is prepared for.
Cont.. : Cont.. Some methods are contrary to law
But accounting standards permits flexibility of interpretation
This coupled with managerial interest results in window dressing
If the intention is to deceive the stakeholders then unethical
Methods of Window Dressing : Methods of Window Dressing
Short term Borrowing : Short term Borrowing Short term borrowing is done just the date on which the balance sheet is drawn up.
This gives an impression that the ability to pay the short term debts is enhanced
But increases an additional liability
Chasing Debtors : Chasing Debtors Special effort to chase debtors before the balance sheet is drawn up
This might involve discounts for prompt payment and extra expense.
Conversion of debtors into cash will improve the balance sheet and cash position of the organization
There is a sudden improve in the liquidity but at the expense of sales revenue
Bringing Forward Sales : Bringing Forward Sales Sales show up in the P&L account when the order is received- not when the cash is received.
If the customers are made to place the orders earlier than planned. There will an increase in the sales revenue figure in the P&L account
This can bring the next years sales to current year
The sales cannot be included in next year’s figure
The problem continues to exsist.
Including Intangible Assets : Including Intangible Assets Intangible assets: Brand name, Good will
Normally only included if purchased
They are subject to depreciation-amortization
But if they are not depreciated the firm maintain the value of its assets thus giving a misleading view of the asset value of the firm.