The writings of Cut-off: Pillar of Performance and Faithful Image
Closing an accounting period is not simply a matter of ceasing invoice processing. For a chartered accountant or financial consultant, the real added value lies in mastering the closing entries. This mechanism for separating accounting periods allows each economic transaction to be linked to its actual period of consumption, thus guaranteeing the reliability of the financial results.
Why is the Cut-off indispensable?
The primary objective is to respect the principle of accrual accounting. Without these adjustments, the income statement would be affected by the vagaries of invoice issuance dates, distorting the profitability analysis.
- Impact on Revenue: We ensure that the revenue shown corresponds strictly to the services performed or the goods delivered.
- Impact on the Balance Sheet: Assets and liabilities are adjusted to reflect actual debts and receivables, thus avoiding the concealment of major financial commitments.
- Usefulness for third parties: Investors and banks demand a smoothed and realistic view of the EBITDA. The tax authorities, for their part, ensure that profits are not artificially shifted from one financial year to another.
The Cut-off scripts
Cut-off entries fall into four main categories. Firstly, Invoices Not Yet Received (FNP) and Credit Notes Not Yet Received (ANP) record expenses or receivables that are certain but for which the supporting documentation has not yet been received. Conversely, Invoices To Be Issued (FAE) and Credit Notes To Be Issued (AAE) allow for the recording of revenues or liabilities to customers for whom the invoice has not yet been issued.
Finally, Accrued Expenses (AEI) and Accrued Revenue (ARC) are used to defer to the following fiscal year expenses or revenues that have already been recorded but relate to a future period. Each classification ensures that the financial statements reflect the economic reality of the fiscal year.
Cut-off writing patterns
Invoices Not Received (FNP) / Accruals / Fatture da ricevere:
This entry records an expense incurred for which the invoice has not yet been received.
- The relevant expense account is debited (Class 6 🇫🇷, 5000 🇬🇧, Costi 🇮🇹)
- The regularization third-party account is credited (4081 🇫🇷, 2101 🇬🇧, Fatture da ricevere 🇮🇹).[NT]Conversely, for an Unreceived Asset (ANP)
- The supplier account is debited (4098 🇫🇷, 2105 🇬🇧, Invoices to be received 🇮🇹)
- The expense account is credited (Class 6 🇫🇷, 5000 🇬🇧, Costi 🇮🇹)
Invoices to be Issued (FAE) / Accrued Income / Invoices to be Issued:
It records a product that has been acquired but not yet invoiced.
- We debit the customer receivable account (4181 🇫🇷, 1103 🇬🇧, Fatture da emettere 🇮🇹)
- We credit the product account (Class 7 🇫🇷, 4000 🇬🇧, Ricavi 🇮🇹).[NT]For a Credit Note to be Established (AAE),
- We debit the product account (Class 7 🇫🇷, 4000 🇬🇧, Ricavi 🇮🇹).
- The customer account is credited (4198 🇫🇷, 2108 🇬🇧, Invoices to be issued 🇮🇹).
In accounting, year-end adjusting entries (accrued expenses, deferred revenue, accrued expenses, accrued revenue) are systematically reversed at the beginning of the following fiscal year, i.e., on January 1st. This operation cancels the provisional impact on the balance sheet, leaving only the actual expense or revenue upon receipt or issuance of the final document.
Charges Acknowledged in Advance (CCA) / Prepayments / Active Discounts:
It allows us to remove from the result an expense that has already been recorded but which relates to the following financial year.
- The adjusting asset account is debited (486 🇫🇷, 1102 🇬🇧, Risconti 🇮🇹)
- The initial expense account is credited (Class 6 🇫🇷, 5000 🇬🇧, Costi 🇮🇹).
Deferred Income / Accrued Income:
It defers to the future financial year a product that has already been invoiced but not yet realized.
- The initial product account is debited (Class 7 🇫🇷, 4000 🇬🇧, Ricavi 🇮🇹)
- The regularization liability account is credited (487 🇫🇷, 2102 🇬🇧, Risconti 🇮🇹).
VAT Management
France: The Goods vs. Services Distinction
In France, VAT on invoices to be issued (FAE) or received (FAR) depends on the nature of the transaction:
Goods deliveries:
VAT is due upon delivery. If the goods are delivered on 31/12 but not invoiced, the VAT must be accrued in account 44587 (VAT on invoices to be issued).
Services provided:
VAT is generally payable upon receipt of payment.
For a service FAE, VAT is not normally provisioned (unless an advance has been received or debits have been opted for).
For a service FAR, VAT is only deductible upon receipt of the invoice and payment.
United Kingdom: The simplicity of the "Tax Point"
Au UK, le concept central est le Tax Point (ou Time of Supply).
Accruals & Prepayments: Unlike in France, these entries are generally recorded Net (excluding taxes) in the balance sheet.
VAT is only recorded when a "VAT Invoice" is issued or a payment is made.
In the absence of an invoice for an accrued expense, VAT cannot be deducted in the current fiscal year. The net amount is then accrued as an expense, while the VAT adjustment is deferred to the following fiscal year, upon receipt of the supporting documentation.
Italy: The Prince of "Competence"
Italy follows a strict correlation logic, but with strong administrative rigor (mandatory electronic invoicing via the SDI system).
Regarding “Fatture da ricevere”, Italian VAT is only deductible after receipt of the invoice and its registration in the purchase records, following a logic similar to that applied in the United Kingdom.
For "Risconti" (CCA/PCA), transactions are carried out almost exclusively on amounts excluding tax. Since VAT has already been processed when the initial invoice was issued or received, the adjusting entry's sole purpose is to transfer the expense or revenue to the following fiscal year.
Although VAT is only declared after invoicing or payment for services, calculating the taxes to be collected and deducted in advance allows for budget monitoring. This adjustment measure, not mandatory in some jurisdictions, is solely intended to anticipate future values.
VAT management on services in France
Managing VAT at the cut-off point is critical, particularly for services where the tax is due upon receipt of payment. When a customer payment is made in December without an invoice being issued, VAT is due immediately. To avoid double billing in the final year (N+1), a VAT neutralization scheme is essential.
Cycle of service fees collected
Regulations
Upon receipt of €1,200, VAT becomes payable. The corresponding tax is then due to the tax authorities, regardless of whether an invoice is subsequently issued.
- Debit 512 (Bank): 1,200
- Credit 411 (Customer): 1,200
VAT OD:
- Debit 4458x (VAT pending invoice): 200
- Credit 44571 (VAT Collected - payable): 200
At the end of fiscal year N, VAT is paid to the tax authorities. The customer account (411 🇫🇷) then shows a credit balance of 1,200, while the VAT adjustment account (4458x 🇫🇷) is debited by 200.
FAE as of 31/12 (Year N)
The objective is to recognize the product in the financial year in which the service was provided.
- Debit account 4181 (Customers - Invoices to be issued) for the amount excluding VAT: 1,000.00
- Debit account 44587 (VAT on invoices to be issued) for the amount of VAT: 200.00
- Credit to account 706 (Services rendered) for the amount excluding VAT: 1,000.00
- Credit to account 4458x (VAT already settled in year N) for the amount of VAT: 200.00[NT]Technical note: The credit of 4458x allows the debit of 44587 to be "neutralized". Thus, the balance sheet is balanced and the VAT collected is not impacted (44571) since it was already paid when the payment was received in December.
FAE reversal scheme as of 01/01 (Year N+1)
We strictly reverse the previous entry to reset the counters to zero before the actual invoice.
- Debit to account 706 (Services rendered): 1,000.00
- Debit to account 4458x (VAT already settled in year N): 200.00
- Credit to account 4181 (Customers - Invoices to be issued): 1,000.00
- Credit to account 44587 (VAT on invoices to be issued): 200.00
Issuance of the invoice
The trick is applied at this stage. The invoice is recorded without affecting account 44571, in order to avoid any impact on the CA3 declaration for the current month.
- Debit 411 (Customer): 1200
- Credit 706 (Product): 1,000
- Credit 4458x (VAT to be adjusted): 200
This cycle allows the final invoice to be issued in January without affecting account 44571, since the tax obligation was honored upon receipt of payment in December.
Compliance Obligations and Challenges
Are we required to record these entries?
The answer is yes. Omitting accrued but not yet received invoices (FNP) or recording prepaid rent as an expense (CCA) distorts the true and fair view of the balance sheet. For the consultant, this represents a guarantee of tax and financial security.
- Audit: The auditors systematically verify the consistency of the cut-off.
- Taxation: An incorrect cut can lead to adjustments in corporate tax.
In conclusion, mastering cut-off entries goes beyond mere accounting technique to become a true strategic management tool. For both chartered accountants and financial consultants, the rigor applied to the separation of fiscal years guarantees transparent financial information that complies with international standards.