Year-End Cut-Off: How to Get Accruals and Prepayments Right

Most year-end surprises come from timing, not from fraud or big mistakes. An invoice that arrives in January for work done in December, or a full year of insurance booked as one month's cost, can move your profit by more than you expect. Getting cut-off right is a few days of careful work that saves weeks of questions from your auditors.

Why cut-off matters more than you think

Accrual accounting means you record income when you earn it and costs when you incur them, not when the cash moves. It is not optional for most businesses. In India, Section 128 of the Companies Act, 2013 says a company's books "shall be kept on accrual basis and according to the double entry system of accounting".

In the UAE, the corporate tax rules allow cash accounting only where revenue does not exceed AED 3 million, or in exceptional cases with Federal Tax Authority approval, as DLA Piper's summary of Ministerial Decision No. 114 of 2023 explains. Above that, you are working on accruals, and your year-end numbers feed straight into your tax return.

Poor cut-off cuts both ways. Missing accruals flatter this year's profit and hit next year. Costs paid in advance but expensed straight away do the opposite. Either way, your MIS stops telling the truth just when owners and banks are looking hardest.

Accruals: costs you owe but have not been billed for

An accrual is a cost that belongs to this year where the supplier's invoice has not yet arrived. Typical examples include utilities, telecom, professional fees, freight, sub-contractor work, staff bonuses and overtime, and interest on loans.

The simplest way to find them is to work from three lists:

• Goods received but not invoiced. Match delivery notes and goods received notes dated on or before year end against supplier invoices. Anything received but not billed needs an accrual.
• Recurring monthly costs. Look at last year's ledger. If you pay rent, internet, cleaning or security every month, check that all twelve months are in the books.
• Post year-end invoices. Review supplier invoices dated in the first four to six weeks of the new year. Any that relate to work done before year end belong in the old year.

For example, a Doha contracting company with a 31 December year end might receive a sub-contractor's bill on 20 January for work finished on 15 December. That cost belongs in December, so it is accrued in the old year and reversed when the invoice is posted.

Use the best evidence you have: a purchase order, a contract rate, a quote or the average of recent bills. An honest estimate is far better than leaving it out.

Prepayments: costs you have paid for in advance

A prepayment is the reverse. You have paid, but some or all of the benefit falls into next year. Common ones for GCC and Indian SMEs include annual insurance, office or warehouse rent paid quarterly or yearly in advance, software subscriptions, trade licence and visa-related renewals, and annual maintenance contracts.

The method is simple:

• List every payment above a set amount that covers more than one month.
• Work out how many months fall after year end.
• Carry that share forward as a prepayment, and release it to the profit and loss account month by month.

Set a sensible threshold so you are not tracking tiny amounts. Many SMEs ignore anything under a few thousand riyals or rupees and focus on the items that move the result.

What this means for your business

For companies in Qatar, the UAE, Saudi Arabia and India, year end is usually also the point where tax, audit and bank reporting meet. Clean cut-off means fewer audit adjustments, a tax computation you can defend, and banking covenants tested on numbers you trust.

It also matters for indirect tax. VAT and GST are generally tied to invoices and the dates set by each country's rules, not to your accruals. So a cost you accrue in December may only be claimed on your VAT or GST return when the valid invoice arrives. Keep the two separate in your workings, and check the timing rules with your adviser.

Finally, think about revenue cut-off too. Goods dispatched or services delivered before year end should be billed or accrued as income; advance payments from customers should sit as a liability until you have done the work.

Your year-end cut-off checklist

• Fix your cut-off date and tell the warehouse, sales and purchasing teams in writing.
• Take a goods received not invoiced report on the last day of the year.
• Review the first four to six weeks of post year-end supplier invoices.
• Check every recurring monthly cost has twelve months booked.
• Build a prepayments schedule with start date, end date and monthly release.
• Accrue bonuses, overtime, leave and other staff costs earned this year.
• Check last dispatches and last invoices around year end for revenue cut-off.
• Keep a one-page list of every accrual and prepayment, with the evidence for each, for your auditors.
• Reverse last year's accruals and make sure none are still sitting on the balance sheet.

If your supplier bills, bank lines and monthly reports already sit in one place, much of this becomes a review rather than a hunt. That is the kind of routine NexCFO's AP, bank reconciliation and MIS reporting tools are built to support.

Good cut-off is not glamorous, but it is the difference between year-end numbers you defend and numbers you trust.