What is cutoff?
The rule that transactions land in the period in which they actually occurred. A florist dates $4,000 of flowers to June 30 or July 1 by the delivery, not the bill.
Definition
Cutoff is the timing rule that puts each transaction in the month it happened. On the books, this is a date test, not an account you debit or credit.
The event date decides the period. The invoice date and the cash date do not.
A florist who takes $4,000 of flowers on June 30 has a June event. The same delivery on July 1 is a July event.
Where it shows up
Balance Sheet: Related to which period a balance is dated.
P&L: Related to which period revenue and expense are dated.
Cash flow: Related to which period a cash movement is dated.
See also: Accrual Cutoff · Adjusting Journal Entry · Accounting Period
When you look at your Balance Sheet, cutoff decides which month a balance is dated. A June 30 delivery sits in June; a July 1 delivery sits in July.
When you look at your Income Statement, cutoff decides which month revenue and expense are dated. The same $4,000 of flowers is June cost or July cost, depending on the arrival date.
On the Statement of Cash Flows, cutoff still follows the event, not the wish to put cash in a nicer month. Cash is dated to the day it moved.
You will not find a cutoff line on any statement. The rule is how dates are assigned, not a printed account.
The general ledger holds the dated entries that passed the test. A late bill still belongs to June if the work happened in June.
How it works
Start with the event. Ask when the goods arrived, when the work was done, or when the cash actually moved.
The goods receipt is often the proof for a purchase. If the receipt is dated June 30, the flowers belong in June even if the vendor bill arrives in July.
If the receipt is dated July 1, the flowers belong in July. Holding the boxes in the cooler overnight does not move the date back.
Revenue follows the same test. Revenue recognition still needs the earning event; cutoff is the date of that event against the month-end line.
Cash follows the day it left or entered the bank. Paying on July 2 does not pull a June delivery out of June.
Someone reviews open receipts, open bills, and late invoices against June 30. Items that happened in June stay in June; items that happened in July wait.
A period lock later stops posting into the closed month. Cutoff is the rule used before anyone locks.
Do not treat the vendor's invoice date as the event. The invoice is paperwork; the delivery or the work is the event.
Example
A florist orders $4,000 of flowers for a weekend rush. The wholesaler can deliver on June 30 or on July 1.
If the van arrives June 30, the inventory belongs in June. The June Balance Sheet shows the flowers, and June statements include that stock.
If the van arrives July 1, the same $4,000 belongs in July. June statements do not include flowers that were not yet in the shop.
The vendor may email the bill on July 3 either way. The bill date does not move a June 30 receipt into July, and it does not pull a July 1 receipt back into June.
The owner can walk the cooler on the evening of June 30. Flowers on the shelf that night are a June event; an empty shelf waiting on the morning van is not.
Cash may leave in July for either delivery. Cutoff for the flowers is still the arrival date, not the payment date.
Common mix-ups
Cutoff is not accrual cutoff. Accrual cutoff is the period-end sweep that captures unbilled expenses; cutoff is the timing rule that says which period any transaction belongs to.
Cutoff is not the adjusting journal entry itself. An adjusting entry may record a late June item; the rule is what decided that the item is June.
Cutoff is not the matching principle. Matching pairs expense with the revenue it helped produce; cutoff only tests whether the event had happened by month-end.
Related terms
- Accrual Cutoff: The period-end sweep to capture unbilled expenses in the period they belong to.
- Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.
- Accounting Period: The span of time a set of financial statements covers.
- Revenue Recognition: The rules for deciding when earned revenue may be recorded.
- Matching Principle: Recording expenses in the same period as the revenue they helped produce.
- Month-End Close: The monthly version of the close, ending in issued financial statements.
- Goods Receipt: The record confirming that ordered goods actually arrived.
- Period Lock: Closing a period in the system so no further entries can be posted to it.