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Home / Financial Tools / Modified Jones Model Discretionary Accruals Estimator

Graduate-Level Modeling · Accounting Earnings Quality

Modified Jones Model Discretionary Accruals Estimator

Total accruals split into two pieces: the part a normal business naturally generates, and the part that's left over. That leftover residual is the single most-cited proxy for earnings management in the accounting literature.

How To Use This Model

Reading This Tool

Set the true non-discretionary accrual relationship and inject a hidden discretionary accrual into a test year.

The tool simulates eight years of clean historical data, estimates Jones Model coefficients by OLS, then applies the Modified Jones formula to the test year to see how closely the estimated discretionary accrual recovers your hidden injection.

True Relationship & Test Year Inputs

Eight years of historical (clean) firm data are simulated using the true relationship you set, then used to estimate Jones Model coefficients exactly as a researcher would from real financial statements.

Estimated Discretionary Accruals

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Estimated Discretionary Accrual (Vs. Hidden Injection)

$0

Actual Total Accruals (Test Year)

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Modified Jones Expected Non-Discretionary

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Total Accruals: Non-Discretionary Vs. Discretionary Component

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Why Subtract Receivables In The Modified Version

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How Close Did The Estimate Get

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Why Estimation Coefficients Come From A Different Period

The coefficients are estimated from eight years of clean historical data, then applied out-of-sample to the test year. This mirrors real research practice, coefficients are typically estimated from an industry-year cross-section or a firm's own pre-event history, specifically to avoid the estimation itself being contaminated by any manipulation in the test period being examined.

Earnings Management Measurement

The Core Formulas

Estimation period: TAt/At-1 = a1(1/At-1) + a2(ΔRevt/At-1) + a3(PPEt/At-1) + ε
Test period NDA: NDAt = a1(1/At-1) + a2[(ΔRevt−ΔRect)/At-1] + a3(PPEt/At-1)
Discretionary Accruals = TAt/At-1 − NDAt

TA is total accruals (net income minus operating cash flow), A is total assets, ΔRev is the change in revenue, ΔRec is the change in receivables, PPE is gross property, plant and equipment. The Jones (1991) original model omits the receivables adjustment; Dechow, Sloan and Sweeney (1995) added it specifically to address credit sales manipulation.

When To Actually Use This Model

  • Academic and practitioner research measuring earnings management around specific corporate events, IPOs, seasoned equity offerings, or executive compensation changes.
  • Teaching earnings quality measurement in a financial accounting theory or empirical accounting research course.
  • Cross-checking the Beneish M-Score's manipulation signal with a continuous, regression-based accrual measure instead of a binary threshold.
  • Building a systematic earnings quality screen across a portfolio or watchlist of companies.

Key Assumptions & Limitations

  • Assumes the estimation period genuinely reflects the firm's normal, non-manipulated accrual-generating process.
  • Requires a reasonably large, homogeneous estimation sample (industry-year or firm time series) for stable coefficient estimates.
  • The model can misclassify genuine business changes (a real surge in credit sales, for example) as discretionary accruals.
  • More recent extensions (the performance-matched Jones model of Kothari, Leone, and Wasley 2005) further adjust for firm performance to reduce this misclassification.

Foundational Reference

Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting Earnings Management. The Accounting Review, 70(2), 193-225.

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