Year-end cut-off

Why the line matters

Most businesses report on the accrual method. The CRA ties income to the fiscal period in which it is earned, even if the cash arrives later, and ties allowable expenses to the period in which they are incurred, even if the bill is still unpaid. Cut-off is how that principle gets applied to the last and first days of the year.

A mistake does not disappear. An expense recorded a week too early overstates this year’s costs and understates next year’s. Sales recorded in the wrong year shift profit and tax from one period to another, and can distort comparisons between years.

An illustrative example

A business has a December 31 year-end. On December 29 it delivers a job and invoices $5,000, but the invoice is entered on January 3. The sale belongs to the year just ended, so it should be recorded as at December 29. On January 4 it receives a $2,000 supplier bill dated December 28 for work received before year-end. That cost also belongs to the old year. The numbers are round and ignore sales tax.

Without cut-off review, the old year would show $5,000 too little revenue and $2,000 too little expense, and the profit would be understated by $3,000.

A practical set of checks

Look at the last few days before year-end and the first few days after. Compare shipping or delivery records and work completed with invoices raised. Review supplier bills and receipts that arrived after year-end for dates that fall before it. Check that deposits, cheques and payroll are in the right period, and that prepayments and customer deposits are not treated as ordinary revenue or expense.

Inventory and work in progress need the same care: a count taken a few days away from the year-end date has to be adjusted for stock received or sold in between. Cash-method taxpayers, such as farmers and fishers, follow different timing rules, so confirm which method applies.

What to discuss with your accountant

Agree on your fiscal year-end and a date by which year-end bills and receipts must be submitted. Ask how late-arriving invoices will be handled once the books are closed, and which accruals and deferrals your accountant will want to see. Bring delivery records, contracts and bank statements that cover the days on either side of year-end.