Skip to main content

Profit Smoothing....

It is now the year end for many companies and the accountants will very busy finalising their company's accounts. You may be very busy to read all of it but I would write in this article... you may find it informative.

Creative Accounting is a dirty word in accounting .... but the world 'creative' is good in the real world. So year end... and companies want to present a very good picture of state of affairs of the company to their shareholders... and the directors would expect that their accountant workout their creative minds in this definitive purpose.... This practise is know as 'Profit Smoothing'

Some of the common methods:

  • Setting up a provision for possible future expenditure. This was then taken to the profit and loss account artificially to enhance profits in the subsequent periods.
  • Recognising profits on long term contracts before they are completed provides opportunities for profit smoothing.
  • Extraordinary items are large unusal items from items from events or transactions that fall outside the scope of ordinary activities of the business and not expected to recur.
  • A company that has large changes in revenue will usually use profit smoothing. This involves moving current income to the future. For example, suppose the company is a video game company, and they get massive revenue "spikes" when a game is released, but relatively low sales the rest of the time. The company will spread the money from the "spikes" out over the year, so that their revenue shows a steady increase from year to year. Using profit smoothing is legal, but can be abused.
  • Accounting Scandals: Click here
  • Fraud Basic: Click here
Share some of the profit smoothing practises you have come across by commenting on the blog, so other fellow accountants would also know and share their thoughts.

Profit Smoothing practices are not recommended as you will comprise your Code of Ethics. I would recommend you read on Financial Reporting


Santosh Puthran

Do you like to be updated in Accountancy ?

Click here to get updates by Email in your inbox


Subscribe in a reader

or Follow me on Twitter

You may also like to read

  1. Red Monkey Innovation
  2. World's 50 most innovative companies
  3. Resistance to Change
  4. Strategic Drift
  5. Strategic Development
  6. Books of Mintzberg on Amazon
  7. Books of Philip Kotler
  8. Porter's Diamond
  9. Honda Bikes - Imposed Strategy 10-May-2008
  10. How to Share Blog Post 25-May-2008
  11. Home
Subscribe to RSS Feeds to keep you up-to-date
  1. Management Accountant
  2. Accountancy News
  3. My Favorite Blogs that I track


Popular posts from this blog

Poll : Does CIMA, UK qualification add value

Poll : Does pursuing CIMA, UK qualification add value to a member of ICWAI, India ? Vote on the poll and share your thoughts by commenting the blog. Poll: Vote here I feel that if you are a member of ICWAI and you pursue CIMA, UK qualification, you are not adding any value to your skills since you will be learning the same. Once you are qualified, you are still a Cost & Management Accountant but from UK. For an employer, I would still have same skills and training on Management Accounting. However if you pursue qualification like Company Secretary or CPA or ACCA , your skills are enhanced with the knowledge gained during training and passing of exams. After qualification, you are bound to follow the CPD programs of ICWAI and other institute. In competitive world, employer look for people with multiple skills. Which one promotes you as professional better against your name: AICWA, ACMA or AICWA, ACS or AICWA, CPA or AICWA, ACCA Widgets Regards, Santosh

Learning Curve Theory

Learning Curve Theory is concerned with the idea that when a new job, process or activity commences for the first time it is likely that the workforce involved will not achieve maximum efficiency immediately. Repetition of the task is likely to make the people more confident and knowledgeable and will eventually result in a more efficient and rapid operation. Eventually the learning process will stop after continually repeating the job. As a consequence the time to complete a task will initially decline and then stabilise once efficient working is achieved. The cumulative average time per unit is assumed to decrease by a constant percentage every time that output doubles. Cumulative average time refers to the average time per unit for all units produced so far, from and including the first one made. Major areas within management accounting where learning curve theory is likely to have consequences and suggest potential limitations of this theory. Areas of consequence: A Standard

Resistence to Change - Approaches of Kotter and Schlesinger

The Six (6) Change Approaches of Kotter and Schlesinger is a model to prevent, decrease or minimize resistance to change in organizations. According to Kotter and Schlesinger (1979), there are four reasons that certain people are resisting change : Parochial self-interest (some people are concerned with the implication of the change for themselves ad how it may effect their own interests, rather than considering the effects for the success of the business) Misunderstanding (communication problems; inadequate information) Low tolerance to change (certain people are very keen on security and stability in their work) Different assessments of the situation (some employees may disagree on the reasons for the change and on the advantages and disadvantages of the change process) Kotter and Schlesinger set out the following six (6) change approaches to deal with this resistance to cha