Transitory assets and liabilities

The income statement contrasts the expenses and the revenues of a specific accounting period. However, in practice, amounts that pertain to a later accounting period get recorded in the expense and revenue accounts, or there are missing entries that should still affect the result of the current period.

Therefore, before the annual financial statements, the so-called accruals are performed. This means that expenses and revenues not correctly timed according to the period are adjusted using transitory entries.

Example of transitory assets

A company rents a warehouse. The rent of CHF 24,000 is paid in advance on October 31st for one year. At the fiscal year-end on December 31, the rental expense must be divided between the old and new financial year as follows:

• On October 31, 2009, the entire annual interest of CHF 24,000 was recorded as rental expense.
• Since the rent pertains to only two months of the year 2009, only CHF 4,000 should appear as rental expense in the income statement for 2009.
• Therefore, before the year-end, CHF 20,000 should be transferred as expenses to the year 2010.

Example of transitory liabilities

A company takes out a loan of CHF 200,000, which is due on September 30 at an interest rate of 6% per year. At the fiscal year-end, the interest expense must be distributed between the old and new financial year as follows:

• Since the annual interest is not due until September 30, 2010, the company has not recorded any capital interest by the year-end on December 31, 2009.
• Since the capital was already utilized for three months in 2009, the corresponding interest must appear as an expense and obligation in the accounting.

Transitory entries are always impactful on profit. They only occur at the year-end. In the context of the reopening, the transitory assets and liabilities are resolved by reversing the entries that justify them.