Cook the book ?

Accountancy is not only science but a very sophisticated art as well , Purpose of this article is just to look at different methods which companies use from time to time to present a different picture of thier books , none of these methods can provide any long term benefit , all they can assure is trouble. Real profit is some thing which is earned by a direct increase of top and bottom line and not just be shifting numbers here and there.

depreciation : Depreciation is an highly effective tool of cooking books , specially for manufacturing and logistics companies which have huge capital investments in machineries and vehicles. Suppose the average industry practice is to depreciate a lath machine for 10 years but some smart company thinks it can depreciate similar machine for 15 years , this kind of tweaking will be effective enough to bring the books from red zone to green as the
earning will be increased because lesser depreciation is being subtracted .

COGS : If Cost of goods sold is subtracted from the revenue that gives gross profit , Further subtractions of operational expenses, interests payments and taxes will take us to the net profit. If one wants to increase gross profit artificially the easy way is to move the cost of goods sold towards operational expense. There will be some smart accountants who found arguments for the same.

Showing earnings in advance : In service industry there are contracts which can be as long as 5 to 7 years , if 40% of the money comes from software development than 60% is from maintainace and support. If an organization is getting into a contract with its client which is about delivering a software as well as supporting it for next 5 years , then it can show any fraction ( as liked by its accountants) of this revenue at any time in the books
and guess what its perfectly legal.

Goodwill : one of the best ways to create an impressive asset base is to increase the goodwill, whenever an organization aquires another there is lot more than just physical property. Mainly a huge client list , good work force , a well established brand etc. all can be put under goodwill. In addition to this if some of the value from plant , property can also be shifted to goodwill , that will mean no depreciation charging for such assets in turn direct impact on the bottom line.

Bill and hold : This has been a very popular accounting technique in many of the organizations which asked their corporate customers to purchase much earlier then the business cycle and pay only after sale has taken place. The purchase made was billed and showed as a revenue in current cycle, very clearly this can work only one odd time.