In brief: The accrual principle requires that income and expenses be recorded in the fiscal year to which they relate, regardless of cash flow timing. It is one of the 7 fundamental accounting principles defined by the CGNC and is essential for accurate financial reporting and tax compliance in Morocco.
The accrual principle, also known as the period-end cut-off principle, is one of the 7 fundamental accounting principles mandated by the General Chart of Accounts (CGNC). It ensures that each fiscal year accurately reflects the transactions that belong to it, guaranteeing the reliability of financial statements and tax compliance in Morocco.
What Is a Fiscal Year?
First, let us define the concept of a fiscal year, a key element of the accounting rules in Morocco. In accounting, a fiscal year corresponds to the period during which the company must maintain its accounts and produce its financial statements.
When a company is created, the shareholders must decide on a closing date for the annual accounts. This closing generally takes place at the end of the year on December 31. However, the shareholders may choose to set this closing date at a different time, for instance June 30 for seasonal businesses.
The first fiscal year runs from the date of incorporation to the first closing. After that, each fiscal year lasts 12 months. The CGNC requires that the life of a company be divided into successive periods followed by a closing: fiscal years.
What Is the Accrual Principle?
Because of this division into fiscal years, the company must prepare accounts for each period. As a result, every time it carries out a transaction, it must determine which fiscal year it belongs to.
The CGNC stipulates that companies must allocate expenses and revenue to the fiscal year to which they relate. This accrual principle forms the foundation of accrual-based accounting in Morocco.
Consequently, companies must record:
- revenue as and when it is effectively earned;
- expenses as and when they are incurred.
Companies must not take into account the dates on which cash is actually received or paid.
Legal Basis in Morocco: CGNC and Law 9-88
The accrual principle is grounded in two major texts of Moroccan accounting law.
The General Chart of Accounts (CGNC) explicitly states this principle among the seven fundamental accounting principles. It stipulates that “only expenses and revenue relating to the fiscal year should appear in that year’s accounts.”
Law 9-88 on the accounting obligations of traders reinforces this requirement. It mandates the maintenance of regular and accurate accounting records, which necessarily implies compliance with the correct allocation of transactions to the relevant fiscal year. Every company subject to this law must produce financial statements in accordance with the CGNC at the close of each fiscal year.
Accrual-Based Accounting
Through this principle, the CGNC has established accrual-based accounting. It moves away from the criteria of cash receipts and disbursements in favour of the triggering event of the transaction.
The principle governing the recording of transactions is:
- Acquisition, with respect to receivables;
- Occurrence, with respect to liabilities.
Accrual-based accounting provides a true picture of a company’s commitments and assets, even if these have not yet been converted into cash. The purpose of the year-end inventory is to ensure the independence of fiscal years by analysing the basis for allocating each operating transaction to a given period.
Accrued Expenses and Accrued Income
Accrued expenses and accrued income represent transactions that have already occurred but for which the supporting document has not yet been received or issued at the closing date. The accrual principle requires that they be recorded in the relevant fiscal year.
Accrued Expenses (Charges a payer)
These are expenses effectively incurred during fiscal year N but for which the invoice arrives after the closing date. For example:
- the electricity bill for December N, received in January N+1;
- leave earned by staff but not yet taken;
- accrued interest on loans not yet due.
Sample journal entry:
| Account | Description | Debit | Credit |
|---|---|---|---|
| 6141 | Telephone, electricity | 5,000 | |
| 4417 | Suppliers – invoices not yet received | 5,000 |
Accrued Income (Produits a recevoir)
These are revenues earned during fiscal year N but not yet invoiced. For example, a service rendered to a client in December N for which the invoice will be issued in January N+1.
Sample journal entry:
| Account | Description | Debit | Credit |
|---|---|---|---|
| 3427 | Customers – invoices to be issued | 10,000 | |
| 7111 | Sales of goods | 10,000 |
Prepaid Expenses and Deferred Income
Prepaid Expenses (Charges constatees d’avance)
Prepaid expenses are costs recorded during fiscal year N but that relate in part or in full to fiscal year N+1. They must be deducted from the expenses of fiscal year N. Common examples include:
- an insurance premium covering the period from 01/09/N to 31/08/N+1;
- a leasing instalment covering months in N+1;
- rent paid in advance for the following quarter.
Adjustment journal entry:
| Account | Description | Debit | Credit |
|---|---|---|---|
| 3491 | Prepaid expenses | 8,000 | |
| 6134 | Insurance premiums | 8,000 |
Deferred Income (Produits constates d’avance)
Deferred income refers to revenue collected or invoiced during fiscal year N but relating to fiscal year N+1. For example, an annual subscription invoiced in October N covering the period from October N to September N+1.
Adjustment journal entry:
| Account | Description | Debit | Credit |
|---|---|---|---|
| 7111 | Sales of goods | 9,000 | |
| 4491 | Deferred income | 9,000 |
Provisions for Risks and Charges
The accrual principle also requires the creation of provisions for risks and charges. These anticipate probable expenses whose amount or timing is not known with certainty at the closing date.
Examples of common provisions:
- provision for pending litigation;
- provision for warranties given to customers;
- provision for employee-related charges (severance pay).
Journal entry:
| Account | Description | Debit | Credit |
|---|---|---|---|
| 6195 | Provisions for risks and charges | 15,000 | |
| 4501 | Provision for litigation | 15,000 |
These provisions must be reviewed at each closing and adjusted based on the evolution of the risk.
Impact on Tax Declarations (IS and IR)
The accrual principle has a direct impact on the calculation of Corporate Tax (IS) and Income Tax (IR) for sole proprietorships.
The Moroccan tax administration requires that taxable income be determined on the basis of expenses and revenue correctly allocated to the fiscal year. Any error in this allocation can trigger a tax reassessment.
Fiscal Adjustments (Reintegrations fiscales)
Failure to comply with the accrual principle can result in fiscal adjustments. The tax administration may notably:
- add back an expense recorded prematurely: a cost relating to fiscal year N+1 deducted in N will be added back to the taxable income for N;
- add back omitted revenue: income earned in N but not recorded will be added to taxable income;
- apply surcharges and penalties: in the event of an audit, the reassessment generally comes with a 15% surcharge and late-payment interest of 5% for the first month, then 0.50% for each additional month.
Common Mistakes During Year-End Closing
During the year-end closing, several errors related to the accrual principle are frequently observed:
- Forgetting to record invoices not yet received: expenses incurred in December for which the invoice arrives in January are often overlooked.
- Failing to adjust prepaid expenses: insurance, rent, or subscriptions paid in advance are not always properly adjusted.
- Confusing invoice date with triggering event: the invoice date is not the allocation criterion; it is the date on which the service was performed or the goods were delivered that matters.
- Neglecting provisions: failing to set up provisions for risks known at the closing date distorts the result.
- Recording personal expenses of the owner: in sole proprietorships, this error is common and exposes the business to a tax reassessment.
Link to Audit and Statutory Auditing
Compliance with the accrual principle is a major checkpoint during the statutory audit performed by the auditor (commissaire aux comptes). The auditor specifically verifies:
- the correct allocation of expenses and revenue to the relevant fiscal year;
- the existence and justification of accrued expenses and accrued income;
- the consistency of prepaid expenses and deferred income;
- the relevance of provisions for risks and charges.
Any significant anomaly in the application of this principle may lead to a qualification in the auditor’s report, or even a refusal to certify the accounts if the impact is material.
Application of the Principle: Practical Cases
The application of this principle also requires the company to record:
- any expense or revenue attributable to the fiscal year but known after the closing date and before the date the financial statements are prepared, among the expenses and revenue of the relevant fiscal year;
- any expense or revenue identified during a fiscal year but relating to a prior fiscal year, among the expenses or revenue of the current fiscal year.
Practical example: the bankruptcy of a major customer, occurring during fiscal year N+1 and known before the date the financial statements are prepared, requires provisioning for its receivables recorded at the close of fiscal year N. This is a post-closing event that directly affects the valuation of assets for fiscal year N.
Rigorous compliance with the accrual principle is essential for any Moroccan company seeking to produce reliable financial statements and meet the requirements of the CGNC and the tax administration.
Frequently Asked Questions
What is the accrual principle in Moroccan accounting?
The accrual principle (principe de spécialisation des exercices) requires that income and expenses be recorded in the fiscal year to which they relate, regardless of when the actual payment or receipt occurs. It is one of the seven fundamental accounting principles defined by the CGNC in Morocco.
How does the accrual principle affect year-end closing in Morocco?
At year-end, companies must identify and record all revenues earned and expenses incurred during the fiscal year, even if invoices have not yet been issued or received. This involves recording accrued expenses, prepaid expenses, accrued income, and deferred income to ensure the financial statements accurately reflect the period’s activity.
What are the consequences of not applying the accrual principle correctly?
Failure to apply the accrual principle can lead to misstated financial results, qualified audit opinions, and tax reassessments by the DGI. The tax administration may reclassify expenses or income to the correct fiscal year, resulting in additional tax, penalties, and late payment interest.
