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Version: 8.1

Cut-off

Introduction​

The accounting cut-off is a procedure used by companies when closing their accounts, that enables to link the income and expenses recorded by the company to the right accounting period. It complies with the accounting principle of the separation of financial years.

When to manage cut-offs : when the company draws up its annual balance sheet, and more specifically when the accounts are closed.

How a cut-off is presented : it is an accounting entry recorded in a specific journal (e.g. Miscellaneous Transactions Journal) which allows the amount of the transaction to be recorded in an adjustment account and allocated to the accounting period with the earliest closing date.

Which situations are concerned :

  • Adjustments to goods already delivered or services already provided but not yet invoiced.

  • Accruals of income or expenses billed in advance that extend beyond the financial year.

  • Accruals of expenses already incurred or income earned at the end of the accounting period but whose amount is uncertain.

Prepaid Expenses & Prepaid Income​

Prepaid Expenses, in the case of a purchase, or Prepaid Income, in the case of a sale, refers to a good or service that has been invoiced by a company before the end of the accounting period without the good or service having been supplied or performed in full.As the income is neutralised, the margin generated must be deferred to the following accounting period. For example: an invoice for rent spread over several accounting periods; an invoice for equipment rental booked at the end of the year but relating in whole or in part to the following accounting period.

Accounting for the cut-off. In the year to be closed:

  • Prepaid Expenses case : The amount of prepaid expenses is shown as an asset. It is debited to account 486. Consequently, the expense accounts are reduced (Class 6) by crediting the relevant account with the amount of the expense.

  • Prepaid Income : The amount of deferred income is shown on the liabilities side. It is credited to account 487. Consequently, the revenue accounts are increased (Class 7) by debiting the relevant account for the amount of the revenue.

  • Impact on the following year : The entry must be reversed so that the margin is recorded in the following year.

  • Calculation of the amount : deferred income or expense is calculated on the basis of the number of days (or months) in the following financial year to which the income or expense should relate.

  • Deferred Income / Deferred Charges = Amount excluding VAT x number of days in N+1 / 360 days.

Example : Company Alpha rents a garage to Company Beta. An annual rental invoice for €20,000 (excluding VAT) is recorded on 1 July N.

At 31 December N, the rental amount for the period from 1 January N+1 to 30 June N+1 will be recognised as deferred income/expense. This would be €10,000 (€20,000 x 180* days / 360 days). Then reverse the entry at the start of the following financial year. *To simplify matters, the number of days has been rounded up to 180. The exact number of days will also depend on the year.

Invoice Not Received & Invoice To Be Established​

An Invoice Not Received, in the case of a purchase, and an Invoice To Be Established, in the case of a sale, refers to goods or services that have been supplied or provided by a company before the end of the accounting period without the invoice having been issued or received. It is therefore necessary to recognise the margin in the financial year in question in order to regularise the time lag between receipt of the goods or performance of the service and transmission/receipt of the invoice.

Recognition of the cut-off - in the financial year to be closed :

  • Invoice Not Received case : the amount of the accrued expense is shown as a liability. It is credited to account 408. Consequently, the expense accounts are increased (Class 6) by debiting the relevant account for the amount of the expense.

  • Invoice To Be Established case : the amount of the income to be invoiced is shown on the assets side. It is debited to account 418. Consequently, the revenue accounts are reduced (Class 7) by crediting the relevant account with the amount of the revenue.

  • Impact on the following year : the entry must be reversed so that the margin is recognised in the following year.

  • VAT : if the good or service is eligible for deduction/collection of VAT, the amount of the expense/income is recorded exclusive of tax. Consequently, VAT is credited/debited to the corresponding account.

Example : Company Alpha delivers goods on 29 December N to customer Beta. The invoice, for €1,000 excluding VAT at 20%, is sent to the customer on 3 January N+1. The gain/cost on this delivery must therefore be allocated to year N. Then reverse the entry at the start of the following financial year.