Round Tripping

Round Tripping Meaning

Round Tripping is an illegal way to inflate revenues by swapping assets or shell transactions, that are done usually on a no-profit basis through a mutual settlement or an agreement. For example, dealers of cloth can enter into a round tripping transaction with dealers of machinery to increase the revenue at no profit basis upon mutual consent or an agreement to reverse the transaction in the next period.

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Source: Round Tripping (wallstreetmojo.com)

Purpose

  • Inflate the Revenue to show the growth of the organisation.
  • To show that the organisation is doing more business than competitors.
  • To manipulate and attract the Investors.
  • To flow the money for personal gains by shell transactions.
  • To convert the black money into legally earned money.
  • To manipulate stock prices and perform insider trading to earn secret profits.
  • To show the company as an operating company.

Example

Mr A doing business of pipes comes to A Inc. who is dealing in servicing of pipes, repairs, etc. with a proposal to buy the pipes from him 100 pieces of $ 10 each amounting to $ 1000 and in return, he will purchase the old pipes which need repairs from A Inc. for $ 5 each, 200 pieces. This transaction is called round-tripping transactions. It looks like barter transactions, but it is done at cost and for mutual benefits of both the parties involved with no profit basis.

Why does Round Tripping Happen?

  • To represent the organisation as busy doing business and growing.
  • To attract investors by showing the growth graph.
  • To make the secret profits in the form of shell transactions through a round tripping business.
  • To make the accounting statement attractive and impressive to the investors.
  • To show the organisation as the operating one to prevent consequences and legal formalities to be performed in intraoperative organisations.
  • To save from the various taxes by investing through foreign investors as in some countries, tax for foreign investors is less.
  • To inflate the stock price of the company.

Benefits

In most cases, round tripping is bad and used to make secret profits by various means. But on the other hand, the round tripping business if done in good faith, proves to be beneficial for the organisation.

Disadvantages

Round Tripping is used as a tool to flow the money and use it for personal gains. It is considered unlawful in most cases. The organisation use it to evade the taxes and convert the black money into white money.

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