Skip to content

You are here:

Accruals have to be recognised in the balance sheet even in the case of small amounts

The Federal Fiscal Court (Bundesfinanzhof, BFH) recently issued a ruling where it decided that, for allocations under the accrual method, businesses that prepare accounts have to create accrual adjusting entries irrespective of the amount, therefore, without making an exception for small amounts.

Generally, an accrual adjusting entry for pre-paid expenses has to be created if the expenses were incurred before the reporting date but only have to be recorded after this date as expenses that reduce income. In this way, the profit-reducing effect is shifted into the next period. Conversely, an accrual adjusting entry for deferred income has to be created if a company receives a payment that is only supposed to have the effect of raising income in a subsequent period.

The BFH dealt with the issue of appropriate accrual adjusting entries in its ruling of 16.3.2021 (case reference: X R 34/19). A businessperson had recorded many small amounts directly as operating costs in the year that the amounts had been paid; these expenses had included payments for liability insurance, advertising and motor vehicle tax. The individual items taken together totalled between €1,315 and €1,550 per year. The local tax office took the view that these pre-paid small amounts should also be accounted for via an accrual adjusting entry for pre-paid expenses so that there would be an increase in income.

In the first instance, the Baden-Wuerttemberg tax court decided that in view of the negligible importance of the costs no accrual adjusting entries needed to be created. The court had been guided here by the value limit of € 410 that was applicable at that time for the instant write-off of low-cost assets (currently this is a net amount of € 800). In the second instance, however, the BFH disagreed with this position and ruled that the local tax office had rightly called for an accrual adjusting entry for pre-paid expenses to be created.

Please note: Under the German Income Tax Act the capitalisation of the respective costs is generally mandatory - there is no option. Since the requirement to create accrual adjusting entries is not limited to significant cases there is a lack of a legal basis for expenses of negligible importance to allow the assumption that there is an option to create an accrual adjusting entry for pre-paid expenses. 

Back
Back to top of page