Just Say No to Creative Accounting
There are many different methods of bookkeeping in the accounting world. While it is up to each individual or business to determine which of these methods they want to use, there are certain laws and guidelines that must be followed by everyone, no matter how they choose to record and report their financial data. There are some people in the accounting world that are either uninformed of these rules or decide to implement their own alternative strategies to skirt around them. This is called “creative accounting.” People coming up in the accounting industry need to be educated in the incorrect methods of bookkeeping in addition to the correct way. One example of creative accounting involves the process of issuing a credit memo to remove an item from the receivables ledger when it is deemed uncollectable rather than writing it off to bad debt. Some would argue that balances can be moved from one account to another without issue. Depending on the account, this is true, but when the item is hidden in an account that is not visible in an audit there are ethics issues. This process can create a myriad of issues. For one, if a client never receives or records this credit, they may still pay the invoice at some point. If a bookkeeper didn’t record the clearing of the original invoice properly, that payment could potentially be recorded to a collection recovery account. This results in your revenues being understated and throws off your profit and loss accounts. Some companies simply rebill the invoice if payment is received, but this is not the proper way to record your data. This is similar to the process of transferring balances from one account to another to alter your reportable financial data. The transference of balances from one account to another can not only be a reconciliation nightmare but it is also, in some cases, unethical. There are a lot of instances where a company or an...
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