Creative accounting refers to systematic misrepresentation of the true income and assets of corporations or other organizations. It is also called aggressive accounting. Creative accounting is a practice whereby a company takes advantage of loopholes to show that they are more profitable or financially stable than they actually are. In many cases of creative accounting, the company is not yet breaking the law, but is most likely engaging in unethical behavior. Sometimes the accountant may wish to show favorable profits (e.g. to get a bonus) at other times losses (e.g. to pay less tax). Sometimes the accountant may wish to show a healthy balance sheet (e.g. to get a bank loan).
Example: If the business has made a loan to another person, the amount of the loan will appear in the balance sheet as an amount owing to the business. If the loan was to someone connected with the business and there is some doubt about its repayment, there could be some attempt to hide the transaction from a reader of the accounts. A temporary arrangement could be set up so that the loan is repaid just before the end of the period and a new loan for the same amount is made just after the end of the period.
Sayed Farrukh Ahmed
Faculty of Business & Economics
Daffodil International University