What is accrual cutoff?

Definition

Accrual cutoff is the period-end sweep that finds unbilled expenses and records them in the month the work happened. On the books, this is a close procedure that posts those costs into accrued liabilities, not a standing account of its own.

It is the search for work that is done but not yet billed. The sweep puts that work in June so June statements are complete.

A plumber who still has $2,200 of subcontractor work open at June 30 needs this sweep. Waiting for the July invoice would leave June short.

Where it shows up

Balance Sheet: Located in the current liabilities section.

P&L: Increases expense in the period the work happened.

Cash flow: Decreases in this account, reported cash from operating activities decreases.

See also: Cutoff · Accrued Liabilities · Adjusting Journal Entry

When you look at your Balance Sheet, the amounts from this sweep sit in current liabilities. They stay there until the vendor bill arrives or the estimate is reversed.

When you look at your Income Statement, the sweep increases expense in the month the work happened. June shows the $2,200 even though no invoice is in the file yet.

On the Statement of Cash Flows, cash has not moved. When the liability later decreases because the bill is paid, reported cash from operating activities decreases.

A large sweep at month-end often means a lot of work landed without bills. A small sweep means most vendors had already invoiced.

The general ledger holds the adjusting journal entry that the sweep produces. You will not find a line labeled accrual cutoff on the statements.

How it works

Near June 30, someone lists work that happened and is not yet billed. Job files, timesheets, and receiving logs are the usual starting points.

The open purchase order report shows orders still open. Any PO with work done in June and no bill yet is a candidate for the sweep.

A goods receipt without a matching bill is another flag. The goods are already in the shop; the invoice has not caught up.

For each item, record an adjusting journal entry in June. Expense goes up, and accrued liabilities go up by the same amount.

The next month, a reversing journal entry often undoes that estimate. When the real bill posts in July, expense lands in July only for any difference, not a second full copy of June's cost.

Do not wait for a perfect invoice if the work is clearly June's. A reasonable estimate keeps the month complete.

Do not sweep items that have not happened yet. A July job is not a June cost, even if the PO was issued in June.

The sweep is not the timing rule itself. Cutoff says the work belongs in June; this sweep is how the shop captures the unbilled pieces.

Example

A plumber finishes a June repair with a subcontractor on site through June 30. The subcontractor has not sent a bill yet; the expected cost is $2,200.

At accrual cutoff, the bookkeeper records this journal entry:

Debit: Subcontractor expense $2,200

Credit: Accrued liabilities $2,200

June expense rises by $2,200, and June current liabilities rise by $2,200. Cash has not moved.

On July 8 the subcontractor bills $2,200. A reversing entry on July 1 has already cleared the accrual, and the July bill then records the cost against the same work without doubling it.

If the bill is $2,300, July picks up the extra $100. June still holds the $2,200 that was known at month-end.

Common mix-ups

Accrual cutoff is not cutoff. Cutoff is the timing rule that says the work belongs in June; this sweep is the search that records the unbilled pieces.

Accrual cutoff is not the general idea of an accrual. An accrual is the recognition itself; this page is the period-end pass that finds the unbilled expenses and posts them.

Accrual cutoff is not accounts payable. Accounts payable is for bills that have arrived; this sweep is for work that has happened with no bill in the file yet.

Related terms

• Cutoff: The rule that transactions land in the period in which they actually occurred.
• Accrual: Recording an expense or revenue when it happens rather than when cash moves.
• Accrued Liabilities: Expenses incurred but not yet billed or paid at period end.
• Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.
• Open Purchase Order Report: The list of issued purchase orders not yet received or billed.
• Reversing Journal Entry: An entry posted at the start of a period to undo a prior period accrual.
• Goods Receipt: The record confirming that ordered goods actually arrived.
• Month-End Close: The monthly version of the close, ending in issued financial statements.