Question

how management can misuse accrual accounting for personal gains. You can discuss credit transactions and accounting estimates.

Answer 1

Accounting is done based on the fundamental accounting concept of accrual basis. Accrual concept is accounting of revenue and expenses as and when they are earned or incurred respectively. Accrual concept does not take into account cash receipts and cash payments for accounting of transactions.

Management accounts credit sales in books based on when sales happen with customers. In order to inflate the profit and show the higher net income credit sales transaction can be accounted without actual sales. This will increase revenue and inflate the profits. Similarly management uses estimates for accounting expenses for example: useful life of assets, provision for contingent liabilities, Provison for doubtful debts, Management can provide accrual of expenses through lower estimates at the yearend as part of closing process and inflate the profits for reporting purpose. For example: A contingent liability can be provided at lower estimate than probable loss to reduce provision and show higher profits.