Cookie Jar Accounting Example

Cookie Jar Accounting Example

Cookie jar accounting is one of bad accounting practice which is used by company to show the earning growth in the year when company's earning is not sufficient. In cookie jar accounting, clever accountant accountant make false reserve for company when company's earning is at highest level and this reserve is used when company is not earning sufficient with his own effort. In other word, it is the way of managing profit not the way to manage business. Sometime, it may be mislead to investor who checks the return on investment before investing in the company. So, this type of accounting practice is not recommended by auditors who audits the company.

Now, we explain cookie jar accounting with simple example

Cookie Jar Accounting Example

Suppose, company earns $ 10,000 dollar on $ 1,00,000 sales. So, profit rate is 10%.  Company's analyst expect profit rate in next year as 20% but third year it will decrease to 5%. Now, company's officer met to his company's clever accountant. Clever accountant gives suggestion that for improving third year profit rate, we have to create false reserve by creating false provision for bad debt which will be equal to 8% of sale. One side this false provision will show in the debit side and it will decrease  next year profit with 8% and we will show this false provision as liability of business in second year's balance sheet. In third year, we close the account of provision for bad debt by transferring it to the credit side of profit and loss account. With this, third year our profit rate will become 13% and in second year our profit rate will be 12% and by doing this, we can show 1% increase in third year.