This is an accounting practice that is used to support a business in bad times. Cookie jar accounting is an approach where reserves or funds stored from good years are used in the times of credit crunch or other bad times. The cash recorded in cookie jar reserves is not displayed or recorded in company’s financial statements. Sometimes cookie jar account is maintained to fulfill a liability that is not occurred yet.
An example of cookie jar accounting can be a situation where a firm wants to restructure its production unit. The cost of restructuring can be termed as a liability and the funds required to fulfill these liabilities are reserved in cookie jar account from the incurred earnings of the firm. Now in next accounting period things are not so good for the firm in terms of financial matter so in order to coup up with this crunch firm can use the reserve amount that were stored for restructuring purposes of firm last year.
The best advantage of cookie jar accounting is that it removes or evens the coming volatility in the business as a result giving an impression to the shareholders and creditors that business is continuously meeting the targets and desired goals. By maintaining cookie jar account a firm can gain a good repute and valuation from the creditors.
Most of the companies don’t try to manipulate numbers to maintain a cookie jar as it has to pay a spiky price if it caught red handed with maintaining this slang called “Cookie Jar”.