Cut off means recording each sale, purchase and stock movement in the accounting period in which it actually happened, not the period in which the invoice was raised or the cash arrived. It is tested by examining transactions either side of the year end, matching despatch notes, goods received notes, invoices and credit notes to the stock count, and adjusting anything that has fallen into the wrong year.

Why does cut off have to be right?

FRS 102 paragraph 2.48 requires financial statements, other than cash flow information, to be prepared on the accrual basis, so items are recognised when they meet the definitions and recognition criteria, not when cash moves. A sale made on 30 December belongs in a December year even if it is invoiced in January.

Tax follows the same rule. Section 46 of the Corporation Tax Act 2009 requires trade profits to be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law. Section 25 of the Income Tax (Trading and Other Income) Act 2005 does the same for unincorporated traders not using the cash basis. A cut off error therefore moves taxable profit between years as well as accounting profit. See cash basis versus accruals.

Auditors treat cut off as a separate assertion. ISA (UK) 315 paragraph A190 defines it as transactions and events having been recorded in the correct accounting period. Unaudited small companies still need it right, because the same profit figure drives the tax return and the dividends the company can lawfully pay.

When does a sale belong in the year?

For accounting periods beginning on or after 1 January 2026, FRS 102 has a new Section 23 based on a five step model. Step 5 recognises revenue when, or as, the entity satisfies a performance obligation. For goods, paragraph 23.85 lists indicators that control has passed at a point in time: a present right to payment, legal title, physical possession, the significant risks and rewards of ownership, and customer acceptance. Paragraph 23.86 adds that no single indicator decides the question, and goods held by a dealer on consignment are not a sale on delivery.

In practice the despatch note or delivery record is the key cut off document for goods. For services, the question is how much of the work has been done by the year end, which may mean accrued income for work done but not yet billed, or deferred income for amounts billed in advance. See accruals and prepayments.

How does purchases cut off connect to the stock count?

For a business holding stock, purchases cut off and stock cut off must agree with each other. If goods are counted as stock at the year end, the purchase must be in the same year. If they were received but not invoiced, accrue the cost as goods received not invoiced. If an invoice has been posted for goods that had not arrived and were not counted, either include them in stock as goods in transit if title has passed, or remove the purchase.

Section 386 of the Companies Act 2006 requires a company dealing in goods to keep statements of stock held at the end of each financial year and the stocktaking statements behind them. ISA (UK) 501 lists control over the movement of inventory and the shipping and receipt of inventory before and after the cut off date among the points to evaluate in count procedures, and notes that auditors may take copies of cut off information at the count to test later. That means recording the last goods received note and the last despatch note numbers on count day. See stock valuation.

How do you test sales cut off?

  1. Record the last despatch note number issued before the year end at the stock count.
  2. Select despatch notes from the last week or two before the year end and check each has a sales invoice posted in the old year.
  3. Select despatch notes from the first week or two after the year end and check none has been invoiced in the old year.
  4. Work from the other direction: take invoices posted in the last days of the year and trace them to despatch notes dated on or before the year end.
  5. Review credit notes issued after the year end. A credit note for goods returned or a price dispute arising before the year end may need to reduce the old year’s sales.
  6. Look for unusually large sales just before the year end that are reversed afterwards.

How do you test purchase cut off?

  1. Record the last goods received note number before the year end.
  2. Take goods received notes from just before the year end and check each is either matched to a posted invoice or included in the goods received not invoiced accrual.
  3. Take goods received notes from just after the year end and check the related invoices are not in the old year.
  4. Review purchase invoices posted in the first month or two of the new year for costs that relate to the old year, such as utilities, professional fees and subcontractor work.
  5. Reconcile major supplier statements at the year end. A difference often turns out to be a cut off item.

ACCA’s Financial Accounting syllabus lists the goods received note, goods despatched note, invoices, credit notes and supplier statements among the business documents an accountant must understand, and cut off testing uses each of them.

What does a cut off adjustment look like?

Illustration only. A company with a 31 December year end finds three items:

Item Effect if not corrected Adjustment
Goods sent to a customer on 30 December, invoiced 3 January for £4,000. Not in the stock count. Sales and profit understated by £4,000 Debit accrued income £4,000, credit sales £4,000
Goods received on 31 December and counted in stock at £1,500. Invoice dated 2 January. Purchases understated, profit overstated by £1,500 Debit purchases £1,500, credit accruals £1,500
Credit note of £600 issued on 15 January for goods returned on 20 December Sales overstated by £600 Debit sales £600, credit a provision against debtors £600

Net, the corrections increase profit by £1,900. Each reverses in the new year when the actual document is posted.

Is VAT cut off the same as accounts cut off?

Not always. VAT follows the tax point rules in section 14 of VAT Notice 700. For goods, the basic tax point is usually the date they are sent or taken away, and for services the date the work is completed. An invoice issued within 14 days after the basic tax point creates an actual tax point on the invoice date, and an invoice or payment before the basic tax point creates a tax point at that earlier date.

In the first example above, the goods left on 30 December but the invoice was issued on 3 January, within 14 days. For accounts the sale belongs in December. For VAT the tax point is 3 January, so if the VAT quarter ended on 31 December the output tax goes on the next return. The accrued income is therefore recorded net of VAT, and the VAT control account picks up the VAT when the invoice is posted.

What mistakes come up most often?

  • Leaving the sales ledger open for January invoices because the period has not been locked. Close the year with proper year end closing entries once cut off has been tested.
  • Counting goods in stock without recording the matching purchase, or the reverse.
  • Treating information received after the year end as a new event when it confirms a condition that existed at the year end. See events after the reporting period.
  • Ignoring an error because it reverses next year. The tax and dividend position for the year is still wrong. Where a material error is found after the accounts are approved, it is dealt with as a prior period adjustment.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.