Basic Accounting Principles for Real Estate Professionals
Accounting fraud is deliberate and improper manipulation of the recording of sales revenue or expenses to make a company’s profit performance appear better than it is. Some things that companies do that can constitute fraud are:
–Not listing prepaid expenses or other incidental assets
–Not showing certain classifications of current assets or liabilities
–Collapsing short- and long-term debt into one amount.
Over-recording sales revenue is the most common technique of accounting fraud. A business may ship products to customers that they haven’t ordered, knowing that those customers will return the products after the end of the year. The business records the shipments as actual sales until the returns are made. Or a business may engage in channel stuffing. It delivers products to dealers or final customers that they don’t want. Still, a business makes deals on the side that provide incentives and special privileges if the dealers or customers don’t object to taking premature delivery of the products. A business may also delay recording products that customers have returned to avoid recognizing these offsets against sales revenue in the current year.
A business commits accounting fraud by underrecording expenses, such as not recording depreciation expenses. Or a business may choose not to record all of its cost of goods sold expense for the sales made during a period. This would increase the gross margin, but the business’s inventory asset would include products that are not in inventory because they’ve been delivered to customers.
A business might also choose not to record asset losses that should be recognized, such as uncollectible accounts receivable, or it might not write down inventory under the lower of cost or market rule. A business might also not record the total amount of the liability for an expense, understating that liability in the company’s balance sheet. Its profit, therefore, would be overstated.
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