What do you mean by Sales cut off:
Sales cut-off means recording sales in the correct accounting period by including only those transactions where goods or services were delivered (physically reached the customer) before the month-end.
Can goods that left the plant/warehouse and truck is not found standing anywhere near the plant, be considered for sales cut off?
Yes, that can qualify as a valid sales cut-off. if the goods have physically left the seller’s control ie truck has already departed and en-route to the customer before month-end, it's typically considered delivered for accounting purposes. The key is that ownership (or risk) has transferred, and the truck is no longer under the seller’s custody.
This aligns with the FOB shipping point principle, where revenue is recognized once goods are dispatched—even if not yet received by the buyer.
Why is Sales cut off procedure done?
Sales cut-off procedures are done to ensure that sales transactions are recorded in the correct accounting period, aligning with the company's financial reporting and revenue recognition policies. Key reasons why the procedure is performed is as follows:
- Timing Accuracy: Errors in sales cut-off, such as recording revenue in wrong period, can lead to overstatement or understatement of sales, impacting profitability ∓ other key financial indicators.
- Inventory Management: Incorrect sales cut-off can result in an overstatement or understatement of inventory, leading to issues in inventory valuation and cost of goods sold calculations.
- Audit Compliance: It is important to note that auditors rely on cut-off procedures to verify that transactions are properly recorded.
- Reliable Financials: Properly executing the sales cut-off ensures that FS present a true and fair picture of the company's financial position and performance, +which are crucial to stakeholders for making informed decisions.
Sales Cut-Off Procedure Steps
In most companies, the sales cut-off procedure is performed depending on their reporting cycle. While month-end cut-offs are common, it is more critical during quarter-end and year-end periods, as the reported figures directly impact financial statements and other external disclosures. Following steps list the standard procedures for sales cut-off testing:
- Set Cut-Off Date & Time
- Identify Eligible Sales
- Verify Dispatch Records
- Review Pending Invoices
- Restrict Late Entries
- Reconcile Inventory
- Audit Trail Documentation
- Post-Cut-Off Review
Define the exact moment sales entries must stop (e.g., 11:59 PM on the last day of the month/Quarter/FY end).
Include only sales where goods have left the warehouse or plant before cut-off. Confirm trucks are no longer under seller’s control.
Match invoices with delivery notes, transport logs, or tracking data to confirm shipment timing.
Finalize and post all approved invoices for goods dispatched before cut-off.
Prevent posting of sales for goods shipped after cut-off into the current period.
Ensure inventory records reflect goods shipped and not mistakenly counted as stock.
Maintain clear records of dispatch timing, invoice posting, and approvals for audit purposes.
Double-check entries made near cut-off for accuracy and adjust any misclassified transactions in the next period with proper documentation.
Cut-Off Sales Reversal: Accounting Treatment
- In Current Period (Reversal of sales recorded)
- In Subsequent Period (Actual Dispatch Happens)
If a sale was wrongly recorded before month-end (e.g., goods hadn’t actually left the seller’s control):
Sales Reversal Entry:
Dr. Sales Revenue
Cr. Accounts Receivable / Customer
This removes the premature revenue and corrects the financials.
Once the goods are truly dispatched and ownership transfers:
Reposting Entry:
Dr. Accounts Receivable / Customer
Cr. Sales Revenue
This re-recognizes the sale in the correct period.