UK Accounting Glossary
Procedures applied to the accounting records at the end of an accounting period to ensure that all transactions for the period are recorded and any transactions not relevant to the period are excluded.
In accounting Cut-Off Procedures are the procedures in which departments in a business will have their data ready for the accountancy team. Whether it is sales or inventory, the data will be ready by a certain agreed date for the accountancy team to report it.
Establishing set procedures for period-ending reporting gives the accounting department time to plan and sets the expectations of all departments to prepare. At the end of an accounting period, if correct cut-off procedures are not established it can be a chaotic time for accountants. Ensuring that there are set procedures for the period ending accounting reporting will give the accountancy department enough time to prepare the accounts and will set the expectation that all departments will be ready in time. The accountancy team will need to work closely with company management and leaders to determine the best time to set the cut-off procedures for the business.
Cut-Off Procedures – Inventory
A businesses inventory is constantly changing. Things are sold, and new goods are received for selling. It requires constant diligence and strong procedures for a company to ensure that it always knows what it has in its inventory so that it can give the accountancy department accurate information. A shipment that has been accounting for in an incorrect month could result in differences of thousands of pounds in reports.
If your accountancy team is preparing monthly reports, it will need time to collate all the information. Often this will take them several days. In the event that your company is wanting its report at the end of the month, on the 30th, then the cut-off date for the warehouses to have counted all the inventory and submitted it could be four days earlier, on the 26th.
It can be a good idea to have a set time, perhaps 12.00, at which the counting of the inventory will take place. All other departments, finishing areas, shop etc should also prepare their inventory at the same time and submit it to the accounting team to give them enough time to prepare their reports.
This will give the accountancy team a defined time period in which they can determine the current inventory and make comparisons to other periods.
Cut-Off Procedures-Accounts Payable
Most companies have a billing cycle. This helps their accounting departments to know when they can b expecting certain bills. However, your business cannot wholly rely on outside companies for consistency in payment. Having solid procedures in pace will give consistency to the calculations of when and how vendor payments are made. Exact times should be set for cut-offs otherwise there could be a carry over into another accounting period which will affect the balance sheet for that period.
When a payment is made it should be immediately entered into the ledger. Also, someone should be tasked with monitoring the end of month payments and incoming invoices. It is important that you classify the liability and the expense in the correct billing cycle. For Example, if workmen bill you for work that they completed on the 27th March on the 27th April it should be entered for April, not for March as it has become a liability for March and an expense for April. If the work was carried out and you were billed in the same month, the expense and liability would be for the same month.
Accounting clerks must know how the company defines expenses, assets revenues and liabilities to make sure that books remain accurate each month. Cut-off periods should allow accountants limited access to the data they need for consistency and accuracy.
Company Audit Procedures
When you audit the company books it is where the accounts payable are confirmed in their correct classifications and the books are reconciled. The auditor will check both the invoice and the payment, then they will ask when the legal requirement to make payment was. Some companies have a 30 day or even a 60-day payment term which naturally can affect when the liability is recorded.
You are not allowed to defer Income or Revenue. However, in the event that a payable is paid early then you are still able to defer it to a later accounting period. To maintain consistency the company should set a standard for how it treats deferred liabilities. Liability deferrals are acceptable in accountancy, however, a company may choose not to follow this practice. It may be that a company chooses not to defer liabilities at all and opts to hold them all in the month that they were established.
Cut-off procedures will be synchronised by the end of December just in time for the annual close.
In order to strengthen the cut-off procedures, the Commission’s Accounting Officer’s services provided the Directorates-General with reports and with a procedure for ex-post cut-off testing.
The cost claims concerned were taken into account for the year-end cut off procedures.
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This glossary post was last updated: 23rd December 2018.