cookie jar reserve

Cookie jar accounting

Cookie jar accounting or cookie jar reserves is an accounting practice in which a company uses generous reserves from good years against losses that might be incurred in bad years.

An example of a cookie jar reserve is a liability created when a company records an expense that is not directly linked to a specific accounting period -- the expense may fall in one period or another. Companies may record such discretionary expense when profits are high because they can afford to take the hit to income. When profits are low, the company reduces the liability (the reserve) rather than recording an expense in the lean year.

The usual result of cookie jar accounting is a "smoothing" of net income over the course of several years.

The United States Securities and Exchange Commission (SEC) does not permit cookie jar accounting by public companies because it can mislead investors regarding a company's financial performance.


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