Why should business owners have cut-off procedures in place?
August 25, 2022
Question:
Why should business owners have cut-off procedures in place?
Facts:
If correct cut-off procedures are not established, it can be a chaotic time for accountants. The year-end closing process is the final opportunity to ensure that financial statements for the fiscal year are accurate.
Discussion:
Avoid common cut-off errors for accounts payable, receivable and cheques by posting expenses in the correct period.
If the expense occurred prior to year-end, but the invoice is received after the fiscal year-end, the expenses and liability should be recorded in the same fiscal period. The exception to this rule is if the books have been closed and sent to your accountant.
If the profitable sales made in January are recorded in February, the following error can be expressed in the month of January.
- Understatement of sales in the month of January
- Understatement of profit in the month of January
- Understatement of receivables/cash in January
Cheques should never be backdated. They should always be dated on the date they are cut, to avoid outstanding cheques at year-end. Cheques should not be held onto after year-end. Avoid using cheques out of sequence.
Take your time and make sure you are recording items in the appropriate period.
Recommendation:
If you would like more information on cut-off procedures and require assistance, please do not hesitate to give us a call.