Revenue adjustment at the turn of the year - recognition in the books

Service-Tax

In the course of an entity's operations, there may be situations that may necessitate adjustments to revenues. Such events have specific effects both on the basis of tax regulations and on the basis of regulations relating to the entity's accounting. In the article below, we will try to discuss how the revenue adjustment at the turn of the year should be recognized in the accounting records.

Principles of correcting revenues in the balance sheet law

At the outset, we must point out that the provisions of the Accounting Act, unlike the provisions of the tax law, do not directly address the issue of how revenues should be adjusted at the turn of the year.

However, this does not change the fact that such an adjustment cannot be made in any way, as the entity must keep in mind that the general rules resulting from the Accounting Act are maintained.

And so we can indicate that pursuant to Art. 6 sec. 1 above of the Act, the entity's books of accounts should include all revenues generated, attributable to it and costs related to these revenues for a given financial year, regardless of the date of their payment.

Moreover, pursuant to Art. 42 sec. 2 of the Act, the operating result is the difference between the net revenues from the sale of products, goods and materials, including subsidies, discounts, rebates and other increases or decreases, excluding value added tax and other taxes directly related to the turnover, and other operating revenues and value of products, goods and materials sold, valued at manufacturing costs or purchase or purchase prices, increased by the total of general administrative expenses, sales of products, goods and materials and other operating expenses incurred from the beginning of the financial year.

However, as it follows from the content of Art. 20 paragraph 1 of the Accounting Act, each event that occurred in this reporting period should be entered in the accounting records of the reporting period.

In the light of the above regulations, adjustments to revenues relating to the previous year and which occurred until the date of preparation of the financial statements should be recognized in the books of the financial year in which the revenue was generated, and not on the date of the event causing the adjustment (e.g. on the date of issuing the correcting invoice). An event requiring the revenue to be corrected should be recorded in the books of the financial year in which the revenue to be corrected arose. This rule applies when an event occurs prior to the preparation of the entity's financial statements.

Revenue adjustment following the preparation of the entity's financial statements

Slightly different rules apply when the event justifying the revenue adjustment takes place after the financial statements have been prepared.

Let us recall that pursuant to Art. 52 sec. 1 of the Accounting Act, the head of the entity ensures the preparation of the annual financial statements no later than within 3 months from the balance sheet date and presents them to the competent authorities in accordance with the applicable legal regulations, the provisions of the statute or the contract (due to the state of the COVID-19 epidemic, this period has been extended in 2020).

The situation in which the event causing the necessity to adjust the income arises after the date of preparation of the financial statements is described in Art. 54 sec. 1 of the Accounting Act.

The wording of this provision states that if, after preparing the annual financial statements, and prior to their approval, the entity has received information about events that have a material effect on the financial statements or that cause the entity's going concern assumption is not substantiated, it should amend these statements accordingly. at the same time making appropriate entries in the accounting books of the financial year to which it relates and notifying the statutory auditor who audits or audited the report. If the events that took place after the balance sheet date do not change the status as of the balance sheet date, appropriate explanations are included in the notes.

In this case, there is a difference between the balance sheet and tax revenues, which means that we are dealing with a temporary difference affecting the deferred income tax. If the event causing the revenue adjustment occurred after the date of preparation of the financial statements, the entity should simultaneously introduce changes to the prepared statements and make appropriate entries in the accounting books of the year to which these financial statements refer.

Adjustment of revenues after approval of the entity's financial statements

Another case may refer to a situation where the event indicating the need to adjust revenues appeared after the approval of the financial statements.

Pursuant to Art. 53 sec. 1 of the Accounting Act, the entity's annual financial statements, subject to para. 2B, shall be approved by the approval authority no later than 6 months from the balance sheet date.

As is clear from Art. 54 sec. 2 above of the Act, if the entity received, after the approval of the annual financial statements, information about events that have a significant impact on these statements, then their effects are recognized in the accounting records of the financial year in which the information was received. If the event causing the revenue adjustment occurred after the date of approval of the financial statements, the entity should recognize this event in the accounting records of the current financial year.

Revenue adjustment at the turn of the year in tax law

For comparative purposes, let's consider how the revenue will be adjusted under tax law. It will be Art. 12 sec. 3j-3m of the CIT Act and Art. 14 sec. 1m – 1p of the PIT Act.

According to the regulations, if the income correction is not caused by an accounting error or other obvious error, it is made by reducing or increasing the income achieved in the settlement period in which the corrective invoice was issued or, in the absence of an invoice, another document confirming the reasons for the correction. If in the aforementioned tax period, the taxpayer has not achieved revenues or the revenues are lower than the amount of the reduction, the taxpayer is obliged to increase the tax deductible costs by the amount by which the revenues have not been reduced.

Example 1.

The taxpayer issued an invoice in December. In January it turned out that he had entered the wrong price for the goods by mistake, which resulted in the need to issue a correcting invoice. In this case, the correction should be attributed to December, ie the period in which the original event occurred.

Example 2.

The taxpayer issued an invoice in December. In January, he decided to grant the buyer a discount, which resulted in the need to issue a corrective invoice. In this situation, the correction should be applied on an ongoing basis, i.e. until January.

Tax law, unlike the accounting regulations, explicitly specifies the rules for correcting revenues at the turn of the year, making the correction system dependent on the reason causing the need for correction. Basically, if the correction is not caused by a billing error or other obvious error, it is done by reducing or increasing the revenues earned in the accounting period in which the correction invoice was issued. Summarizing the analysis performed, we can indicate that the principles of recognizing revenue adjustments at the turn of the year, in the context of accounting regulations, depend on the moment when this event occurred. If this circumstance occurred before approval of the report, it should be entered in the books of the financial year for which the report is prepared. If, on the other hand, the circumstance occurs after the approval of the report, it should be included in the current accounting books.