What Is Topside Entry?

They must ensure the reliability of auditing as a profession by allowing as few discrepancies past their fingers as possible, especially the ones caused by topside entries. The breadth and depth of offerings that Cadency provides is simply unmatched in the Record to Report space. Here are a few ways to prevent abuse, catch errors, and give peace of mind on top-side and post-close journal entries…if you must use them.

Get senior management approval

In order for the subsidiary companies’ balance sheets to more accurately reflect their true business activity, the parent company may allocate its own costs or income to those entities.
This ensures that you know who might be making topside entry adjustments and you might be less likely to see the privilege abused.
Given that you might provide the goods or services over an extended period of time, you might record these as an adjustment.
Let’s say the owner of an advertising company decides to invest $10,000 cash in his business.
This makes sure that you are aware of any potential topside entry adjustments and may make it less likely that the privilege will be abused.

You might record this revenue when you make the sale and record it on your balance sheet as cash owed to you by the customer. While you havent yet received the income from the sale, you may need to record it to make sure it is included for the period in which you earned it. This type of adjustment is more common in industries where a customer contracts work that may take an extended period to fully complete.

Companies undergoing mergers, acquisitions or restructuring are particularly susceptible to the fraudulent misuse of top-side journal entries. The guidelines may be included in the company’s policies and procedures manual, which is made available to all employees for accountability and transparency. You should be able to spot and fix any errors or discrepancies if the workers in charge of making topside entry adjustments adhere to these procedures. Make a list of all topside entries entered into the accounting system before generating your final financial statements. This could be helpful because these transactions are not recorded in the general ledger of the business or on the ledgers of any of the subsidiary businesses.

No Ordinary Journals: Top-Side and Post-Close

Explore how topside entries influence financial reports, their strategic uses, and the importance of internal controls for accurate reconciliation. Depreciation expenses, or non-cash expenses, represent the value lost on fixed assets over an accounting period. A depreciation expense is considered a non-cash expense because the loss is due to wear and tear or obsolescence rather than a cash expenditure. Additionally, each topside journal must be accompanied by a description that explains why it was necessary. Therefore, the journal itself, which is a subsidiary book, contains all of the original entries. The value lost on fixed assets over an accounting period is represented by depreciation expenses, also known as non-cash expenses.

Fraud Tip Friday: Injecting Fraud Risk into Enterprise Risk Management

Topside accounting involves adjustments at the parent company level to ensure consolidated financial statements reflect a multinational corporation’s financial health. A primary focus is eliminating intercompany transactions, which can lead to double counting of revenues or expenses. For example, if one subsidiary sells goods to another, the revenue and corresponding expense must be removed to prevent inflating the company’s financial performance. Topside entries are strategic tools in financial reporting, ensuring consolidated financial statements reflect a business’s economic reality. Made at the corporate level, they bypass subsidiary ledgers to align financial results with corporate strategy. For example, a company might use topside entries to adjust for intercompany transactions not fully eliminated in subsidiary accounts, preventing misstatements in consolidated financial statements.

Earned income from your product or service that you have not yet received or processed is known as accrued revenue. When you make the sale, you might record this revenue and show it as money the customer owes you on your balance sheet. Even though you haven’t yet received the sale’s proceeds, you might still need to record them to make sure they’re included in the period in which they were earned. This kind of adjustment is more typical in fields where a customer contracts work that might take a long time to finish.

The parent company normally performs these topside entries during the preparation of consolidated financial statements. Topside adjustments normally dont flow down to the subsidiary ledgers, so the subsidiary companies are not usually aware of them, nor are they involved with making these adjustments. While the practice of making topside adjustments can be abused, its considered broadly acceptable within the Generally Accepted Accounting Principles (GAAP). Topside entry, also known as a topside journal entry, is a practice in accounting where a parent company modifies the financial statements of its subsidiary companies.

Key Concepts and Uses of Topside Entries

To accurately reflect the business activity of the company as a whole in its financial statements, which is possibly the main reason a parent company might use topside entry adjustments. For instance, if the subsidiary companies’ balance sheets have deferred revenue or accrued expenses, this could present a misleading picture of the overall business’s month-to-month financial situation. In order for the subsidiary companies’ balance sheets to more accurately reflect their true business activity, the parent company may allocate its own costs or income to those entities. As a result, when the business pays employees their salaries, the balance in this account typically drops to zero. Before creating your final financial statements, produce a list of all topside entries recorded in the accounting system. This may be useful since these entries are not recorded in the companys general ledger, nor are they on the ledgers of any of the subsidiary companies.

This may include updating approval processes, ensuring comparability across the entities, enhancing segregation of duties, or implementing additional oversight measures. 1) If there is a erroneously overstatement its profits in a month, we can use a topside entry to adjust the account balances. Creating a journal entry is the process of recording and tracking any transaction that your business conducts. Therefore, the journal itself, which is a subsidiary book, contains what is a topside journal entry all of the original entries. Supplies ordered from a vendor, loan interest payments, and taxes are examples of accrued expenses.

Adjustments made at the parent level can reveal underlying trends and provide insights into the operational efficiency of a multinational corporation. For example, profitability ratios such as return on equity (ROE) become more meaningful when intercompany transactions and inconsistent reporting methods are removed. This is because technically the entities are separate trial balances – we cannot debit one trial balance and credit the other, it would leave us with unbalanced trial balances. Elimination entries come into play in a group context, meaning where there are two or more entities consolidating into one for the purpose of financial reporting. In these instances, there are likely intercompany balances present at the end of the reporting period inflating the results of the group entity when considering the two entities as one.

Topside accounting is integral to global financial reporting, allowing parent companies to adjust consolidated financial statements for a more accurate depiction of their financial position. This is particularly important for multinational operations navigating different accounting standards, such as GAAP and IFRS. The Center for Audit Quality advises auditors to look for manual adjusting entries, including top-side journal entries, made after a financial reporting period closes. Auditors then should consider why the entry was made, who did it, whether that person was authorized to record an entry, when the entry was recorded and the underlying evidence to support the entry.

Top side entries is a term that is often used interchangeably to refer to elimination or consolidation entries, and adjusting entries. For instance, short-term liabilities may be reclassified as long-term if they are expected to be settled beyond the current fiscal year. Similarly, expense classifications might be adjusted to align with the parent company’s reporting structure. These practices provide stakeholders with a clearer view of the company’s financial position.

An auditor can compare this to your financial statements if you can produce a list of the entries that were made. This expense may be based on a suppliers estimate since at the time the expense occurred you probably had not yet received an invoice. Examples of accrued expenses include supplies ordered from a vendor, interest payments on a loan and taxes. A deferred expense, also known as a deferred charge, is a cost you’ve already paid for but haven’t yet received the goods or services you ordered.

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For example, a company might use topside entries to adjust for intercompany transactions not fully eliminated in subsidiary accounts, preventing misstatements in consolidated financial statements.
You might record these as an adjustment since you might supply the products or services over an extended period of time.

This process is instrumental in maintaining investor confidence by ensuring financial reports comply with standards like IFRS or GAAP and reflect the economic realities of the business. Similarly, in order to record the cash outflow in the company’s records, a journal entry for the advance salary will be necessary. The amount of the advance salary is deducted from the payment amount when the business pays the employees their regular salaries. A valid use of top-side journal entries might be to allocate some of a parent company’s income or expenses to its subsidiaries to accurately reflect business activity. However, top-side adjustments can also be used to improperly reduce liability accounts, increase revenue or decrease expenses.

Elimination and consolidation top side entries

If you can generate a list of the entries made, an auditor can reconcile this against your financial statements. We understand that the CFO organization is focused on improving and optimizing the Record to Report process to produce accurate financial reporting while reducing risk and cost. Topside entry, or topside journal entry, is an accounting practice where a parent company makes adjustments on the accounting sheets of its subsidiary companies.

Deferred expenses are viewed as long-term assets for accounting purposes because you typically receive the goods or services over a long period of topside accounting time, typically twelve months or more. An insurance premium that you pay in advance for the following insurance period is an example of a deferred expense. Parent companies use topside entry adjustments to reflect the operations of their subsidiary companies. For instance, a subsidiary company’s balance sheet includes a topside entry for deferred revenues and accrued expenses.