In plain English
Year-end cutoff matters for inventory, accruals and revenue so items fall in the correct year.
Document your cutoff procedures.
Why it matters
Cutoff decides which year a transaction lands in. If December sales slip into January, or January bills are booked to December, profit moves between years. That can change your tax return and make year-over-year comparisons misleading. It also matters at month end if you rely on monthly reports for decisions.
Inventory is particularly sensitive, since goods received but not billed, or billed but not received, can be double counted or missed.
Worked example
Goods received January 2 belong in the new year, even if the bill is dated December 30.
How to handle it
- Pick the period end date and note the last invoice, bill and receiving document numbers for that period.
- Review bills dated just after period end to see whether the goods or services were received before it.
- Review sales just before and after period end to confirm delivery or completion dates.
- Record accruals for anything received or earned in the period but not yet entered.
- Lock the period in your software once adjustments are done.
Common mistakes
- Using the bill date rather than the date goods or services were received, which puts costs in the wrong year.
- Counting inventory on one day and booking receipts through a later day, which double counts stock.
- Editing a closed period after reports were shared, which changes figures others relied on.
Not the same as: Accrual basis accounting
Accrual basis is the overall method of recording income when earned and expenses when incurred. Cutoff is the specific check that each transaction falls on the correct side of a period end date under that method. See Accrual basis accounting.
Go deeper
- Year-End Inventory Count and Valuation Records: How to plan a physical inventory count, reconcile it to the books, record shrinkage and keep the valuation support your preparer needs.
- Year-End Bookkeeping Checklist for a Small Business: A practical order for closing the books: reconcile accounts, clear uncategorized items, set cutoffs, gather records and build a package for your accountant.
Related terms
- Debit and credit: The left and right sides of an accounting entry. Every entry has equal debits and credits.
- Deferred revenue: Money received before you have earned it, recorded as a liability until you deliver.
- Current liabilities: Debts and obligations due within about a year.
Common questions
What is a cutoff?
The date used to decide which period a transaction belongs to.
Can you give an example of cutoff?
Goods received January 2 belong in the new year, even if the bill is dated December 30.
Does cutoff matter on a cash basis?
Yes, but the test is simpler. On a cash basis the question is when the money was received or paid, so it focuses on deposit and payment dates rather than delivery dates.
What if I find a cutoff error after the return is filed?
Talk to your accountant before changing anything in the closed year. They can advise whether to adjust the current year or amend.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.