Accounting Regularization Entries in Morocco: A Practical Guide for a Successful Financial Year-End Close

Understanding Accounting Regularization Entries at Year-End

Year-end regularization entries are crucial for accurately aligning expenses and revenues with the accounting period to which they truly belong. This practice adheres to the accrual basis of accounting, a fundamental principle of the Moroccan General Chart of Accounts (CGNC). Six main categories of entries are involved: accruals, deferred income, prepaid expenses (CCA), deferred revenue (PCA), foreign exchange differences on receivables and payables, and stock adjustments.

Why Regularize at Year-End?

The accrual basis of accounting, also known as the principle of independence of accounting periods, is one of the seven fundamental accounting principles of the CGNC. It mandates that expenses and revenues be recorded in the period in which they are incurred or earned, regardless of the date of payment or receipt.

In practice, there is often a time lag between the economic realization of a transaction and its reflection in an invoice or cash flow. The purpose of regularization entries is precisely to correct this discrepancy. Without them, the year's results would be distorted, and the financial statements would not provide a true and fair view of the company's assets and financial position.

These entries are made during inventory work, before the preparation of the post-inventory trial balance. They are then reversed at the beginning of the following financial year (except for stocks and foreign exchange differences, which follow specific treatments).

1. Accruals (Suppliers - Unreceived Invoices)

Accruals represent expenses that are certain in principle and amount, relate to the current financial year, but for which the invoice has not yet been received by the closing date. A typical case is a supplier who delivered goods in December, but whose invoice arrives only in January.

Accounts Used (CGNC)

• Debit: Account 6111 - Purchases of Goods (or other Class 6 expense account)
• Credit: Account 4417 - Suppliers - Unreceived Invoices
• Purpose: Recognition of the accrued expense

Example

A company receives a delivery of goods on December 28, N, for an amount of 50,000 DH (excl. VAT). The supplier's invoice is dated January 5, N+1.

Entry on 31/12/N:

• Debit: 6111 - Purchases of goods: 50,000 DH
• Credit: 4417 - Suppliers - Unreceived invoices: 50,000 DH

At the beginning of year N+1, this entry is reversed. When the invoice arrives, it is recorded normally.

2. Deferred Income (Clients - Unbilled Invoices)

Deferred income is the opposite of accruals. These are revenues earned by the company for the current financial year, but for which the invoice has not yet been issued by the closing date. This often includes completed service provisions that have not yet been billed.

Accounts Used (CGNC)

• Debit: Account 3427 - Clients - Invoices to be Issued and Receivables for Services Not Yet Billed
• Credit: Account 7111 - Sales of Goods (or other Class 7 revenue account)
• Purpose: Recognition of the deferred income

Example

An accounting firm completed an audit engagement in December N for an amount of 80,000 DH (excl. VAT). The invoice will be issued in January N+1. If you need support for your audit engagements or bookkeeping services, iHub is here to assist you.

Entry on 31/12/N:

• Debit: 3427 - Clients - Invoices to be issued: 80,000 DH
• Credit: 7124 - Services rendered: 80,000 DH

The entry is reversed at the opening of N+1, and the invoice is accounted for normally upon its issuance.

3. Prepaid Expenses (CCA)

Prepaid expenses are charges that have been recorded during the current year but actually relate to services or consumption that will occur in the following year. Therefore, they must be 'removed' from the current year's results and allocated to N+1.

The most common cases include insurance premiums straddling two financial years, rent paid in advance, or annual subscriptions.

Accounts Used (CGNC)

• Debit: Account 3491 - Prepaid Expenses
• Credit: Account 6xxx - Relevant expense account
• Purpose: Regularization of prepaid expenses

Example

A company pays an annual insurance premium of 24,000 DH on October 1, N, covering the period from October 1, N, to September 30, N+1.

The expense recorded in N is 24,000 DH, but only 3 months (October to December) concern year N. The N+1 portion is 24,000 × 9/12 = 18,000 DH.

Entry on 31/12/N:

• Debit: 3491 - Prepaid expenses: 18,000 DH
• Credit: 6134 - Insurance premiums: 18,000 DH

On January 1, N+1, the reversal reestablishes the expense in year N+1.

4. Deferred Revenue (PCA)

Deferred revenue is the mirror image of prepaid expenses. These are revenues received or recorded during the current year but relate to services or deliveries that will be performed in the following year. The portion of the revenue related to N+1 must be neutralized.

Accounts Used (CGNC)

• Debit: Account 7xxx - Relevant revenue account
• Credit: Account 4491 - Deferred Revenue
• Purpose: Regularization of deferred revenue

Example

A firm bills an annual accounting advisory subscription for 36,000 DH on November 1, N, covering the period from November 1, N, to October 31, N+1. This is a common practice for an accounting advisory service.

The revenue recorded in N is 36,000 DH. The portion related to N+1 is 36,000 × 10/12 = 30,000 DH.

Entry on 31/12/N:

• Debit: 7124 - Services rendered: 30,000 DH
• Credit: 4491 - Deferred revenue: 30,000 DH

5. Foreign Exchange Differences (Receivables and Payables in Foreign Currencies)

Companies that conduct operations in foreign currencies must revalue their receivables and payables denominated in foreign currency at the exchange rate on the inventory date at year-end. The difference between the initial amount recorded at the historical rate and the equivalent value at the closing rate constitutes a foreign exchange difference. For companies managing operations in foreign currencies, meticulous bookkeeping is essential.

Treatment According to CGNC

• Active foreign exchange difference (latent loss): The receivable has lost value, or the payable has increased. The difference is debited to account 3701 - Decrease in fixed asset receivables or 3702 - Increase in financing debts (depending on the case). A provision for foreign exchange risk must be set up to cover this latent loss.
• Passive foreign exchange difference (latent gain): The receivable has increased, or the payable has decreased. The difference is credited to account 4701 - Increase in fixed asset receivables or 4702 - Decrease in financing debts. In accordance with the principle of prudence, this latent gain is not recognized as revenue.

Example

A company holds a customer receivable of 10,000 USD recorded at a historical rate of 10.00 DH/USD (100,000 DH). On 31/12/N, the rate is 9.50 DH/USD, resulting in an equivalent value of 95,000 DH. The latent loss is 5,000 DH.

Entry on 31/12/N:

• Debit: 3701 - Foreign exchange difference - Active (decrease in receivables): 5,000 DH
• Credit: 3421 - Clients: 5,000 DH

And constitution of the provision for foreign exchange risk:

• Debit: 6393 - Allocations to provisions for financial risks and charges: 5,000 DH
• Credit: 4506 - Provisions for exchange losses: 5,000 DH

6. Stock Adjustments

Stock regularization consists of two successive operations: the cancellation of the opening stock (recorded at the beginning of the financial year) and the recognition of the closing stock determined by the physical inventory at year-end.

Entries for Goods

Cancellation of opening stock:

• Debit: 6114 - Variation in stock of goods: Opening stock amount
• Credit: 3111 - Goods: Opening stock amount

Recognition of closing stock:

• Debit: 3111 - Goods: Closing stock amount
• Credit: 6114 - Variation in stock of goods: Closing stock amount

Example

The opening stock of goods on 01/01/N is 200,000 DH. The physical inventory on 31/12/N determines a closing stock of 250,000 DH.

The stock variation is 250,000 − 200,000 = +50,000 DH, which decreases the cost of goods sold (destocking increases the expense, overstocking decreases it).

Summary and Key Considerations

For each of these six categories, remember the essential rules:

• Justification: Each regularization entry must be supported by a document or a justifying calculation.
• Reversal: Entries for prepaid expenses, deferred revenue, accruals, and deferred income are reversed at the beginning of the following financial year.
• Consistency: The methods adopted must be applied consistently from one financial year to another.
• Materiality: In practice, immaterial amounts may not be regularized, provided this choice is documented.
• Control: The review of regularization entries is an integral part of the annual accounting close.

A well-organized closing file, with a summary statement of all regularization entries, facilitates the auditor's work and secures the reliability of the accounts.

FAQ – Regularization Entries in Morocco

What is the legal basis for regularization entries?

The CGNC establishes the principle of accrual accounting as one of the fundamental accounting principles. Law 9-88 on the accounting obligations of traders requires that annual accounts be prepared to provide a true and fair view of the company's assets, financial position, and results. Regularization entries are essential to comply with these requirements.

Should regularization entries always be reversed?

Yes, entries for accruals, deferred income, prepaid expenses, and deferred revenue must be reversed at the beginning of the following financial year. For stocks, the mechanism is different: the opening stock is canceled, and the closing stock is recognized; there is no strict reversal. Foreign exchange differences are also reversed at the opening.

How to treat an accrued expense whose exact amount is unknown?

If the exact amount of the expense is not known with certainty at the closing date, it should be reasonably estimated based on available information. If the estimate remains highly uncertain, it may be more appropriate to recognize a provision rather than an accrued expense.

Should foreign exchange differences always lead to a provision?

Only active foreign exchange differences (latent losses) require the constitution of a provision for foreign exchange risk. Passive foreign exchange differences (latent gains) are not recognized as revenue, in accordance with the principle of prudence. They appear only on the liabilities side of the balance sheet in a regularization account.

What is the risk of not making regularization entries?

Non-compliance with the accrual basis of accounting can lead to an incorrect accounting result, an inaccurate tax base, and potentially a tax adjustment by the tax administration. Furthermore, the statutory auditor may issue a qualified opinion on the accounts if regularization entries are not properly made. Avoid accounting and tax errors with the help of our bookkeeping services at iHub, ensuring your accounts are always compliant.