Creative accounting, also known as aggressive accounting, refers to imaginative ways of reporting accounts. It is a tool that is used falsely to establish or interpret accounting policies to misuse accounting bodies’ accounting techniques and principles. This form of practice aims to make more revenue and profits by not disclosing the exact figures.
Creative accounting activities follow the rules and laws prevailing in the country, but they deviate from those laws’ creators.
Creative accounting does not present the ‘right and fair’ view of a business as it tries to show enterprises more profitable and successful by portraying their enhanced image.
Creative accounting example
ABC company send its customer an invoice before the end of the accounting period but deliver the goods after that period. Subsequently, that first period will get a boost in profit as well as sales. It is an example of creative accounting as ABC company tried to inflate the sales and shows their business more profitable before delivering the goods to the customer.
Advantages
- Creative accounting allows the organization to set the necessary parameters or criteria for them, which is technically challenging.
- Creative accounting will be helpful for the loss of producing businesses as well. Investors can be optimistic by seeing the firms’ budgeted accounts’ potential profits, and the company can deal with the given situation several times.
- The firm can show a smooth and excellent increasing graph of the market. The management adopts this strategy to demonstrate steady income and strong sales to attract their investors.
- An organization may hide the financial risk that they tend to experience elsewhere with creative accounting.
Disadvantages
- Creative accounting is an ethical practice, but sometimes it is treated as illegal. If there is a misrepresentation of specific values (unethically or illogically), certain qualifications are required.
- The company will still be at a high risk of losing its investors, and if the investors get to know the manipulations, it will create a negative image and affects the goodwill of a company. Also, it affects the investor’s interest.
- In the long run, if it is revealed that the company is doing a creative accounting practice, then their customers’ perceptions of the company will also be at risk; therefore, the company will lose its customers and business.