The concept of "two sets of books" refers to the practice of attempting to hide or disguise certain financial transactions from outsiders by having a set of fraudulent
accounting
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
records (or "books") for official use and another, the real set, for personal records.
Keeping two sets of books has its disadvantages and advantages. The concept of having two sets of books is so that public traded companies can prepare the financial statements for the US
Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
, investors and sometimes the
Internal Revenue Service
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...
. That is considered an advantage because it shows investors that they are a rich company. Therefore, they can get more shareholders to buy their stocks. The disadvantage with these companies for having two sets of books is when they report one or both of the books to the Internal Revenue Service, they tend to lower their income to avoid taxes.
Organisations that keep two sets of books can sometimes be caught when a tax inspector or other official happens to make a visit and asks to see the books, and an inexperienced member of staff happens to be on duty and shows the wrong set of books.
Related situations
Keeping "two sets of books" does not always refer to an illegal practice. Most
publicly-traded companies
A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (list ...
use the legal practice and abide by the rules set by the
Financial Accounting Standards Board
The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...
(FASB) when they prepare financial statements and abide by the
Internal Revenue Code
The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 ...
when they prepare tax returns.
The goal is then to maximize income for the financial statements so that when investors see them, they are intrigued to invest. On the other hand, companies want to have a lower income on the tax returns to avoid being required to pay high taxes.
See also
*
Tax evasion
Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts, and others. Tax evasion often entails the deliberate misrepresentation of the taxpayer's affairs to the tax authorities to reduce the taxp ...
*
Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
(US)
*
investors
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
*
Internal Revenue Service
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...
(US)
*
Stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
s
*
Shareholders
A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal owner ...
*
Accounting ethics
Accounting ethics is primarily a field of applied ethics and is part of business ethics and human ethics, the study of moral values and judgments as they apply to accountancy. It is an example of professional ethics. Accounting was introduced by ...
*
Creative accounting
Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices, but deviate from the spirit of those rules with questionable accounting ethics—specifically distortin ...
References
Accounting systems
{{accounting-stub