When closing the books, remember to account for both prepaid and deferred expenses. This will ensure your accounts accurately reflect your company's financial position and report the correct financial result.

As we approach the end of the 2024 Corporate Income Tax fiscal year, we are reviewing one of the most important tasks for ensuring accounting and tax accuracy: the accrual of income and expenses. This process, besides being mandatory, allows for a true reflection of the company's financial position, aligning expenses and income with the fiscal year to which they actually correspond, according to the accrual principle established by the Spanish General Accounting Plan (PGC).

Accrual principle

The Spanish General Accounting Plan (PGC) states that the effects of transactions must be reflected in the financial year in which they occur, regardless of when they are paid or received. This means that, to comply with Article 11 of the Corporate Income Tax Law (LIS), taxpayers must record expenses and income in the period in which they are actually incurred. However, it is possible to request an alternative timing method of recognition from the Tax Administration, such as the cash basis, provided that the request is submitted within the stipulated deadlines and the Administration does not respond negatively within six months.

Note: In exceptional and duly justified cases, the accrual principle may be departed if this allows for a more accurate representation of the company's financial position.

Periodizations

When closing your accounts, we recommend paying special attention to the following categories of expenses and income:

1. Prepaid expenses

• Expenses paid in the current fiscal year that belong to the following year. Examples: insurance premiums, prepaid rent, or expenses for trade fairs that will take place next year.
• Recording: These expenses should be charged against account 480 (Prepaid Expenses). When the expense is incurred, this account will be reversed and the corresponding expense will be charged.

2. Accrued but unpaid expenses (Deferred expenses)

• Expenses corresponding to the current fiscal year, but whose payment will be made in the next year, such as extra payments or interest on loans not yet due.
• Registration: they are recorded against a supplier account or account 4109 (invoices pending receipt).

3. Revenue collected in advance

• Income received in the current fiscal year for supplies or services to be provided in the following fiscal year. These must be recorded in a specific account and reflected in the future fiscal year to which they pertain.

4. Accrued but uncollected revenue

• Revenue generated in the current fiscal year, even if payment has not yet been received. Example: services provided in December, but invoiced in January.
• Recording: must be recognized as income in the current period.

Changes in accounting estimates and criteria

It is essential to identify any changes in estimates or accounting criteria:

• Change in accounting estimate: it will be applied prospectively, affecting the result of the current period.
• Change in accounting policy: it is applied retroactively, adjusting past results in reserves.
• Accounting errors: must be corrected to reflect the correct accrual period.

Forward transactions

At year-end, installment sales require specific treatment to accurately reflect revenue. In these transactions, revenue is not recognized in full at the time of sale or service provision, but rather in installments, according to the payment terms established in the contract.

• Proportional allocation: Only the portion of revenue due in the current year is recognized, based on the collection periods. Outstanding revenue will be recognized in the corresponding future periods.
• Example: If your company sells a service in 2024 with payments over several years, you only need to allocate the portion corresponding to 2024, leaving the rest for the following years.

This method ensures that accounting reflects the actual income of each year, aligning with the accrual principle and avoiding overestimating results at the end of the fiscal year.

Example of periodizations for the closing of 2024

Servicios Empresariales SA's fiscal year ends on December 31, 2024. During the year, the company incurred various expenses and revenues that must be adjusted to comply with the accrual principle. Below, we detail how to perform these adjustments:

• Insurance Premiums: The company pays an annual insurance premium of €12,000 in October 2024, which covers until October 2025. Since part of the expense corresponds to the following fiscal year, only the period up to December 31, i.e., €3,000, should be allocated to 2024. The remaining €9,000 will be recorded in account 480 (Prepaid Expenses) and recognized in 2025.
• Premises lease: In November 2024, the company pays one year's rent in advance for €24,000. The company should record only the 2 months of 2024 (€4,000) and the remaining €20,000 in the prepaid expenses account, recognizing them monthly in 2025.
• Employee bonuses: At the end of 2024, the company must recognize the proportional part of the bonuses accrued during the year, even if they are paid in June 2025. If the total bonuses amount to 30,000 euros, Servicios Empresariales SA must record the expense in 2024 against the provisions account.
• Loan interest: The company has a loan whose accrued interest as of December 31 amounts to 5,000 euros, but the payment is scheduled for January 2025. This amount must be recorded as an expense in 2024 in the corresponding financial expenses account.
• Maintenance contracts: In September 2024, the company charges 18,000 euros for an annual maintenance contract that will extend until September 2025. The part corresponding to 2025 (12,000 euros) should be recorded in account 485 (Deferred revenue), recognizing only 6,000 euros in 2024.
• Services provided in December: The company provides services in December 2024 for 15,000 euros, but the invoice and payment are scheduled for January 2025. For closing purposes, the income must be recorded in 2024 in the corresponding account, even though it has not been collected.
• Sale of equipment: In July 2024, Servicios Empresariales SA sells equipment to a company for €40,000, with a payment plan of four annual installments of €10,000 each. To correctly reflect this income, only the first installment of €10,000 should be recognized in 2024, and the remaining installments will be recognized proportionally in the fiscal years 2025, 2026, and 2027.

You can contact this professional office for any questions or clarifications you may have.

Warm regards,

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MGI Àmbit

A Àmbit Assessor, SL has 40 years dedicated to the tax, comptable and labor consultancy of the Pime.

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