Creative Accounting: Pros And Disadvantages Of Expensess In Accounting
1465 Words6 Pages
QUESTION 1
A.
“Expenses in accounting is defined as a reduction of asset of company which is used to create revenue.” (Pizzey, 1998). Expenses may be an amount immediately consumed for purchasing an item and recorded when the expenses incurred, such as salary, material, electricity bill. In addition, “the expenses would be from fixed asset over a long period as a form of depreciation”(Seal, Rohde, Garrison, & Noreen, 2015). On the other hand, “the prepayments which are not expired are recognized as an asset in balance sheet rather than reported in the income statement as expenses.” (Brewer, Garrison, & Noreen, 2008). Once the prepaid expenses come to the due date, “the prepayment is recorded in the income statement as an expense with amount…show more content… As the result, the income statement shows the brighter result with lower expense, higher revenue and impressively higher income than the actual. However, there are some disadvantages of creative accounting method suggested by Financial Director. Firstly, the income is made up to be higher than the real one, therefore the income tax the company must pay would be higher. The amount of tax a company must pay is calculated by the…show more content… As the result, the company would not receive the amount of capital as expected. In addition, the possible issue in this case is that the system of corporate government would be impacted by Vega due to he owns a significant amount of share allocated by Ben. One of the corporate issues which may be resulted from this case is that the leak of information about the company to the public before the financial and business information is disclose for an initial public offering. Thus, the information released by Vega could be of use to the competitors of the company, it leads to that the company business and future plan would take risks and damage by the information