|Cookie Jar Accounting Example|
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.