Cookie jar accounting or cookie jar reserves is an accounting practice in which a company uses generous reserve

Reserve (Accounting)

In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. Sometimes, the term is used instead of the term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting...

s 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

Expense

In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...

 that is not directly linked to a specific accounting period

Accounting period

An accounting period is a period with reference to which United Kingdom corporation tax is charged. It helps dictate when tax is paid on income and gains...

 -- the expense may fall in one period or another. Companies may record such discretionary expense when profits

Profit (accounting)

In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...

 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 United States Securities and Exchange Commission

United States Securities and Exchange Commission

The U.S. Securities and Exchange Commission is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States...

 (SEC) does not permit cookie jar accounting by public companies

Public company

This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...

because it can mislead investors regarding a company's financial performance.