Many businesses run as a holding company (or parent company) with numerous subsidiaries. When preparing the consolidated financial statements in such companies, adjustments are made by the parent company to the accounting sheets of its subsidiaries. The Generally Accepted Accounting Principles (GAAP) permit this practice, known as top-sided journal entry. Allocating some of the parent company’s income or expense to its subsidiaries in order to more accurately reflect business activity is a perfectly acceptable practice. However, it can also be employed inadvertently to lower liability accounts, boost revenue, or cut costs. Usually, businesses record them right before preparing the financial statements, following the consolidation of journals or ledgers. Additionally, because those events may occur after the period end, they are not reflected in a company’s general ledgers and sub ledgers. If you are the CFO, you need to consider the controls you have in place to shield your company from this risk.
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What are the types of topside entry adjustments?
You can perform topside entries for five different types of entry adjustments. They are:
Accrued revenues
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.
Accrued expenses
An expense that you have incurred and recorded but have not yet paid is known as an accrued expense. Since you probably hadn’t received an invoice when the expense occurred, it’s possible that this expense is based on the supplier’s estimate. Supplies ordered from a vendor, loan interest payments, and taxes are examples of accrued expenses. Since you might not receive a formal notice of payment due until after the accounting period in which the expense was incurred, you might need to record the accrued expense even though you haven’t yet received one.
Deferred revenues
Before you deliver the product or provide the service, you earn income known as deferred revenue. Due to the fact that you have already been paid for work that you have not yet finished, this adjustment may also be known as unearned income. Rent pre-payments or subscription services are examples of deferred revenue. Given that you might provide the goods or services over an extended period of time, you might record these as an adjustment.
Deferred expenses
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. Deferred expenses are viewed as long-term assets for accounting purposes because you typically receive the goods or services over a long period of 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.
Depreciation expenses
The value lost on fixed assets over an accounting period is represented by depreciation expenses, also known as non-cash expenses. Because the loss results from normal wear and tear or obsolescence rather than a cash outlay, depreciation expenses are regarded as non-cash expenses. Depending on whether you expect depreciation to occur at a steady rate over a period of years or irregularly due to, for instance, an initial sharp decline in value followed by a steady decline, there are various methods for calculating depreciation expenses.
What is topside entry?
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. These topside entries are typically carried out by the parent company when preparing consolidated financial statements. The subsidiary companies typically are not aware of topside adjustments and are not involved in making them because they typically do not flow down to the subsidiary ledgers. Generally Accepted Accounting Principles (GAAP) consider topside adjustments to be generally acceptable, despite the possibility of abuse.
Why are topside entry adjustments used?
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.
How to ensure accurate topside entries
It helps to have procedures in place that uphold accountability for these manual changes if you want to guarantee the accuracy of your topside entries. The following techniques can be used to manage the integrity of your topside entries:
1. Create a list of topside entries made
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. An auditor can compare this to your financial statements if you can produce a list of the entries that were made.
2. Make sure temporary entries are only temporary
Make sure to undo any temporary topside entry adjustments you’ve made when no longer necessary if some or all of them were. For instance, if you made an adjustment because of an accrued expense, you no longer require that adjustment once the expense has been paid. Check to see if you can automatically reverse these entries in your accounting system after some time.
3. Limit the number of authorized people
Limiting the number of employees in your business who are permitted to make topside entry adjustments can also be helpful. Give a select few dependable individuals the required access privileges to your accounting system. 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.
4. Get senior management approval
Make sure you have senior management approval before posting any topside entry adjustments. This provides senior management with knowledge of each change, the chance to learn more, and the ability to accept or reject each suggested adjustment. You might be more likely to make adjustments only when they are absolutely necessary if you know that senior management has to approve of every topside entry adjustment.
5. Create written policies on topside entries
Making written guidelines for how topside entries should be completed is another way to promote regular and accurate topside entry adjustments. 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.
6. Invite auditors to review the entries
You could also request that topside entry adjustments be reviewed by internal and external auditors. Your auditors might have to perform this as part of their duties in any case. You can promote accuracy in both the documentation and execution of your procedures by giving them access to all the documentation you have regarding the entries made, who made them, and the justifications for those decisions. This will show transparency.
FA13 – Adjusting Journal Entries Explained
FAQ
What is a topside entry example?
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.
What is the entry in the journal called?
Every business transaction must first be recorded in journal. These are called journal entry. Therefore, the journal itself, which is a subsidiary book, contains all of the original entries.
What is an entry example?
The act of entering, a method of entering, a record in a journal, or a piece of information on a list are all examples of entries. A door that is open is an instance of an entry. A door leading into a home is an example of an entry. What you record in your journal today serves as an example of an entry.
What is a financial entry?
A transaction is formally recorded in an accounting entry. The majority of the time, an accounting entry is made using the double entry bookkeeping method, which necessitates the creation of both a debit and credit entry and ultimately results in the production of a full set of financial statements.
