In brief: Year-end adjusting entries ensure that expenses and income are allocated to the fiscal year to which they actually relate, in accordance with the accruals principle (matching principle) established by the CGNC. Six major categories of entries are involved: accrued expenses, accrued income, prepaid expenses (CCA), deferred income (PCA), translation differences on foreign currency receivables and payables, and inventory adjustments.
Why Make Adjustments at Year-End?
The accruals principle, also known as the principle of independence of fiscal years, is one of the seven fundamental accounting principles of the CGNC. It requires that expenses and income be recorded in the fiscal year during which they are incurred or earned, regardless of the date of payment or receipt.
In practice, the gap between the economic occurrence of a transaction and its reflection in an invoice or cash flow is frequent. It is precisely the role of adjusting entries to correct this gap. Without them, the year’s result would be distorted, and the financial statements would not provide a true and fair view of the company’s assets and financial position.
These entries are posted during the inventory work, before preparing the post-inventory trial balance. They are then reversed at the opening of the following fiscal year (except for inventories and translation differences, which follow a specific treatment).
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1. Accrued Expenses (Suppliers — Invoices Not Yet Received)
Accrued expenses correspond to charges that are certain in their nature and amount and relate to the current fiscal year, but for which the invoice has not yet been received at the closing date. A typical case is a supplier who delivered goods in December but whose invoice arrives only in January.
Accounts Used (PCGE)
| Debit | Credit | Description |
|---|---|---|
| 6111 — Purchases of goods (or other class 6 account) | 4417 — Suppliers — invoices not yet received | Recognition of accrued expense |
Worked Example
A company receives a delivery of goods on 28 December of year N for an amount of 50,000 MAD (VAT excluded). The supplier’s invoice is dated 5 January of year N+1.
Entry at 31/12/N:
| Account | Description | Debit | Credit |
|---|---|---|---|
| 6111 | Purchases of goods | 50,000 | |
| 4417 | Suppliers — invoices not yet received | 50,000 |
At the opening of year N+1, this entry is reversed. When the invoice arrives, it is recorded normally.
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2. Accrued Income (Customers — Invoices to Be Issued)
Accrued income is the counterpart of accrued expenses. It relates to income earned by the company during the current fiscal year, but for which the invoice has not yet been issued at the closing date. This is notably the case for services completed but not yet invoiced.
Accounts Used (PCGE)
| Debit | Credit | Description |
|---|---|---|
| 3427 — Customers — invoices to be issued | 7111 — Sales of goods (or other class 7 account) | Recognition of accrued income |
Worked Example
A chartered accountancy firm completed an audit engagement in December of year N for an amount of 80,000 MAD (VAT excluded). The invoice will be issued in January of year N+1.
Entry at 31/12/N:
| Account | Description | Debit | Credit |
|---|---|---|---|
| 3427 | Customers — invoices to be issued | 80,000 | |
| 7124 | Services rendered | 80,000 |
The entry is reversed at the opening of year N+1, and the invoice is recorded normally when issued.
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3. Prepaid Expenses (CCA)
Prepaid expenses are charges that have been recorded during the fiscal year but actually correspond to services or consumption that will only occur in the following fiscal year. They must therefore be “removed” from the result of year N and allocated to year N+1.
The most common cases are insurance premiums straddling two fiscal years, rent paid in advance or annual subscriptions.
Accounts Used (PCGE)
| Debit | Credit | Description |
|---|---|---|
| 3491 — Prepaid expenses | 6xxx — Relevant expense account | Adjustment of prepaid expenses |
Worked Example
A company pays on 1 October of year N an annual insurance premium of 24,000 MAD covering the period from 1 October of year N to 30 September of year N+1.
The expense recorded in year N is 24,000 MAD, but only 3 months (October to December) relate to year N. The portion relating to year N+1 is 24,000 × 9/12 = 18,000 MAD.
Entry at 31/12/N:
| Account | Description | Debit | Credit |
|---|---|---|---|
| 3491 | Prepaid expenses | 18,000 | |
| 6134 | Insurance premiums | 18,000 |
On 1 January of year N+1, the reversal reconstitutes the expense in year N+1.
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4. Deferred Income (PCA)
Deferred income is the mirror image of prepaid expenses. It relates to income received or recorded during the fiscal year, but which relates to services or deliveries that will be performed in the following fiscal year. The portion of income relating to year N+1 must be neutralised.
Accounts Used (PCGE)
| Debit | Credit | Description |
|---|---|---|
| 7xxx — Relevant income account | 4491 — Deferred income | Adjustment of deferred income |
Worked Example
A firm invoices on 1 November of year N an annual accounting advisory subscription of 36,000 MAD covering the period from 1 November of year N to 31 October of year N+1.
The income recorded in year N is 36,000 MAD. The portion relating to year N+1 is 36,000 × 10/12 = 30,000 MAD.
Entry at 31/12/N:
| Account | Description | Debit | Credit |
|---|---|---|---|
| 7124 | Services rendered | 30,000 | |
| 4491 | Deferred income | 30,000 |
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5. Translation Differences (Foreign Currency Receivables and Payables)
Companies that carry out foreign currency transactions must, at year-end, revalue their foreign currency receivables and payables at the exchange rate on the inventory date. The difference between the initial amount recorded at the historical rate and the equivalent at the closing rate constitutes a translation difference.
Treatment Under the CGNC
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Translation difference — asset (unrealised loss): the receivable has lost value or the payable has increased. The difference is posted to the debit of account 3701 — Decrease in long-term receivables or 3702 — Increase in long-term payables (as applicable). A provision for foreign exchange risk must be recognised to cover this unrealised loss.
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Translation difference — liability (unrealised gain): the receivable has increased or the payable has decreased. The difference is posted to the credit of account 4701 — Increase in long-term receivables or 4702 — Decrease in long-term payables. Under the prudence principle, this unrealised gain is not recognised as income.
Worked Example
A company holds a customer receivable of 10,000 USD recorded at the historical rate of 10.00 MAD/USD (100,000 MAD). At 31/12/N, the rate is 9.50 MAD/USD, giving an equivalent of 95,000 MAD. The unrealised loss is 5,000 MAD.
Entry at 31/12/N:
| Account | Description | Debit | Credit |
|---|---|---|---|
| 3701 | Translation difference — asset (decrease in receivables) | 5,000 | |
| 3421 | Customers | 5,000 |
And recognition of the provision for foreign exchange risk:
| Account | Description | Debit | Credit |
|---|---|---|---|
| 6393 | Financial provisions for risks and charges | 5,000 | |
| 4506 | Provisions for foreign exchange losses | 5,000 |
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6. Inventory Adjustments
Inventory adjustment consists of two successive operations: the cancellation of opening inventory (recorded at the start of the fiscal year) and the recognition of closing inventory as determined by the year-end physical count.
Entries for Goods
Cancellation of opening inventory:
| Account | Description | Debit | Credit |
|---|---|---|---|
| 6114 | Changes in inventories of goods | Opening inventory | |
| 3111 | Goods | Opening inventory |
Recognition of closing inventory:
| Account | Description | Debit | Credit |
|---|---|---|---|
| 3111 | Goods | Closing inventory | |
| 6114 | Changes in inventories of goods | Closing inventory |
Worked Example
Opening inventory of goods on 01/01/N is 200,000 MAD. The physical count at 31/12/N determines a closing inventory of 250,000 MAD.
The change in inventories is 250,000 − 200,000 = +50,000 MAD, which reduces the cost of goods consumed (destocking increases the charge, restocking decreases it).
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Summary and Key Points
For each of these six categories, remember the essential rules:
- Documentation: each adjusting entry must be supported by a document or a calculation
- Reversal: prepaid expense, deferred income, accrued expense and accrued income entries are reversed at the opening of the following fiscal year
- Consistency: the methods adopted must be applied consistently from one fiscal year to the next
- Materiality: in practice, immaterial amounts may not require adjustment, provided this choice is documented
- Review: the review of adjusting entries is an integral part of the annual closing of accounts
A well-organised closing file, with a summary statement of all adjusting entries, facilitates the auditor’s work and secures the reliability of the accounts.
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FAQ — Year-End Adjusting Entries in Morocco
What is the legal basis for adjusting entries?
The CGNC establishes the accruals principle as one of the fundamental accounting principles. Law 9-88 on the accounting obligations of merchants requires that annual accounts be prepared so as to provide a true and fair view of the company’s assets, financial position and results. Adjusting entries are essential for meeting these requirements.
Must adjusting entries always be reversed?
Yes, accrued expense, accrued income, prepaid expense and deferred income entries must be reversed at the opening of the following fiscal year. For inventories, the mechanism is different: opening inventory is cancelled and closing inventory is recognised — there is no reversal in the strict sense. Translation differences are also reversed at the opening.
How should an accrued expense with an unknown exact amount be treated?
If the exact amount of the expense is not known at the closing date, it should be reasonably estimated based on available information. If the estimate remains highly uncertain, it may be more appropriate to recognise a provision rather than an accrued expense.
Must translation differences always give rise to a provision?
Only translation differences on the asset side (unrealised losses) give rise to the recognition of a provision for foreign exchange risk. Translation differences on the liability side (unrealised gains) are not recognised as income, in accordance with the prudence principle. They appear only on the liabilities side of the balance sheet in a suspense account.
What is the risk of not posting adjusting entries?
Failure to comply with the accruals principle may result in an incorrect accounting result, an incorrect tax base and potentially a reassessment by the tax authorities. Furthermore, the auditor may issue a qualified opinion on the accounts if adjustments are not correctly made.
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