Cut Off

Procedures
Cut Off Procedures

By :
-Prexa
By PrexaGokani
Gokani
Cut Off - Overview
❖ Cut off relates to whether transactions and events have been recorded in the
correct accounting period.

❖ Cut off procedures - audit procedure for verifying the compliance of accrual
concept.

❖ ‘Audit Assertion’.

❖ It’s basically where you put full stop while finalization.

❖ Illustration:
The auditor may want to test proper cut off of revenue transactions at
accounting year end. This can be done by examining a sample of shipping
documents and sales invoices for a few days before and after year-end.
Implications of Cut off Procedures
❖ Compliance of Cut off affects the transactions as follows:

a) Audit is carried out for transactions occurring in a particular time frame.

b) Important role in recognition of revenue and expenses.

c) If the Cut off procedures are not complied, transactions shall not be
recorded in the relevant accruing period.

d) Misstatement of income and expenses.

LOCAL TRADE

A Ltd.’s Factory B Ltd.’s Factory

A Ltd (Kerala)
B Ltd (Baroda)
31st March, 2017
2nd April, 2017

A Ltd sells goods to B Ltd on 31st March 2017 so risk and rewards were
transferred on that date only. The same goods were received by B Ltd on 2nd
April 2017 .But in buyer’s books purchase would be recorded on date of invoice
i.e. 31st March but at that time goods were not received by the buyer so it
would record it as GIT which would increase it’s inventory and when the actual
goods would be received GIT entry would be reversed.
Incoterms
❖ Incoterms i.e. International Commercial Terms are the commonly used trade
terms relating to International Sales and Purchases published by ‘International
Chamber of Commerce’.

❖ While doing international trade both buyer and seller must be aware of the
incoterms.

❖ Main aim - to avoid misunderstandings arising in any countries.

Types Of Incoterms
 Bill of lading
 A bill of lading (sometimes abbreviated as B/L) is a document issued by
a carrier (or his agent) to acknowledge receipt of cargo for shipment. In
British English, the term relates to ship transport only.

 A bill of lading must be negotiable and serves three main functions:

a) it is a conclusive receipt
b) it contains or evidences the terms of the contract of carriage; and
c) it serves as a document of title to the goods.

❖ Bills of lading is one of three crucial documents used in international

trade to ensure that exporters receive payment and importers receive the
merchandise.
Bill Of Entry
❖ Formal declaration describing goods that are being imported or
exported. Examined by customs officials to confirm that the contents of
a shipment conform with the law, and to determine which taxes, tariffs,
and restrictions may apply to the shipment.

❖ Prepared by the importer or exporter, with many companies hiring clerk

specifically to handle the preparation process.

❖ Customs officials reserve the right to inspect the shipment to determine

whether or not it is consistent with the bill of entry and if not
discrepancies can be grounded for legal proceedings.
Difference Between Bill of Entry and Bill of Lading

Bill of entry :

❖ Declaration by an importer or exporter of the exact nature, precise quantity

and value of goods that have landed or are being shipped out. Prepared by a
qualified customs clerk or broker, it is examined by customs authorities for its
accuracy and conformity.

❖ Use: can do GR as per this document.

Bill of lading (B/L) :

❖ Document issued by a carrier, or its agent, to the shipper as a contract of

carriage of goods. It is also a receipt for cargo accepted for transportation, and
must be presented for taking delivery at the destination.

❖ Use :It can be used as reference while you enter the invoice for delivery cost.
INTERNATIONAL TRADE

port of destination
port of export
Bill of Lading
31st March,2017

A Ltd (Baroda) B Ltd (United States)

26th March,2017 8th April,2017

Incoterms: Exe Works (EXE)

• When the goods are removed from seller’s
Transfer of Risk
premises
Freight • No freight
Insurance • No Insurance
INTERNATIONAL TRADE

port of destination
port of export
Bill of Lading
31st March,2017

A Ltd (Baroda) B Ltd (United States)

26th March,2017 8th April,2017

Incoterms: Free On Board (FOB)

Transfer Of Risk • At the port of Export

Freight • Till the port of Export

Insurance • Till the port of Export

INTERNATIONAL TRADE

port of destination
port of export
Bill of Lading
31st March,2017

A Ltd (Baroda) B Ltd (United States)

26th March,2017 8th April,2017

Incoterms: Carriage Insurance Freight (CIF)

Transfer OF Risk • At the Port Of Export

Freight • Till the Port Of Destination

Insurance • Till the port of Destination

INTERNATIONAL TRADE

port of destination
port of export
Bill of Lading
1st April,2017

A Ltd (Baroda) B Ltd (United States)

26th March,2017 8th April,2017

Incoterms: Carriage & Freight (CFR)

Transfer Of Risk • At The Port Of Export

Freight • Till the port of Destination

Insurance • Till the port of Export

ACCOUNTING FOR EXPENSES

No provision for expenses related to

Goods booked as Material in Transit
(MIT)

Provision for Expenses

Provision for expenses related to

Finished Goods in Transit must be
booked. (FG in Transit)

 Purchase: This is because the expenses have not been incurred when the MIT
is been booked

 Sales: At the same time the expenses have already been incurred upto the
port when FG in Transit entry is passed.
MERCHANDISE EXPORT FROM INDIA SCHEME(MEIS)
 MEIS is an incentive scheme which is received for doing exports.

 Main Objective- To remove the infrastructural deficiencies.

 MEIS Incentives are received only when the exports are done.

 But here it is necessary to see that the export incentives received are recorded
on accrual basis.

 Many companies record it on certainty basis.

 Thus it is important to check that it is recorded on accrual basis.

THANK YOU