Earning management is the process of planning and timing of gains, revenues, losses as well as expenses to smooth out the earning process within an entity.
Work Step by Step
In many cases, earning management is utilized with the intention of increasing income at the expense of future years. Why am I saying this? Because if the owners want proof of progress, the entity may be forced to recognize revenue from incomplete sales or make unrealistic assumptions in order to boost current year earnings. However, these assumptions may hurt them within the next periods.