What is a Topside Entry? (2022 Guide)
Topside entry adjustments allow parent companies to more accurately reflect their business activities by making their subsidiaries' balance sheets reflect deferred revenues or accrued expenses. Parent companies also can allocate their own income and costs to their subsidiaries. In other words, they can use the topside entry to show how much a subsidiary contributes to the business of the parent company. In addition, topside entries are often used to reflect the results of the joint venture.
What is topside entry?
If you're not familiar with the term, topside entry refers to an accounting adjustment that is used to reflect the activity of the entire organization. These entries may show accrued expenses or deferred revenues. In many cases, parent companies use topside entries to allocate costs and income to their subsidiary companies. By implementing a written policy, you can help to prevent inconsistencies and ensure that all topside entries are treated equally.
A topside entry is an adjustment made by a parent company to the accounting sheets of its subsidiaries during the preparation of consolidated financial statements. It is a necessity in accounting and is used to allocate costs and income between subsidiaries. It is a type of journal entry recorded at the corporate level, and is often performed when preparing consolidated financial statements of a parent company and its subsidiaries. If done correctly, it can ensure the accuracy of financial statements.
What are the types of topside entry adjustments?
Topside entry adjustments are used by parent companies to reflect the business activities of their subsidiary companies. For example, deferred revenues and accrued expenses in the balance sheet of a subsidiary company are recorded as a topside entry. A parent company can then allocate its own income and costs to the subsidiary company. But there is a downside to this approach. Not only can it lead to inconsistencies in accounting, it can also cause mistakes.
Topside entry is a non-routine journal entry made by the parent company on the accounting sheets of its subsidiary companies. It carries risks because it is not subject to the standard financial system controls. These topside entries don't flow through to the subsidiary ledgers, and management of the subsidiary might not even know about them. In this case, an auditor is needed to identify these errors. Topside entries are typically recorded during a consolidated financial statement process.
Revenue produced from your product or service but not yet received or processed is known as accrued revenue. You might record this revenue as cash owing to you by the customer on your balance sheet when you complete the sale. Even if you haven't yet received the sale proceeds, you may need to record them to ensure that they are included in the period in which they were earned. This modification is more typical in businesses where a client contracts work that will take a long time to complete.
An accumulated cost is one that you've incurred and recorded but haven't paid yet. Because you had not yet received an invoice when the spending happened, it's possible that it was based on a supplier's estimate. Supplies ordered from a vendor, interest payments on a loan, and taxes are all examples of accumulated costs. Because you may not get an official notification that payment is due until after the accounting period in which you created the expenditure, you may need to report the accumulated expense even though you haven't received an official indication that payment is due.
Deferred revenue is money you make before you provide the product or provide the service. Because you've been paid for work you haven't completed, this adjustment is also known as unearned income. Deferred income includes things like rent prepayments and subscription services. Because you may provide the items or services over a long period of time, you may choose to record these as an adjustment.
A delayed expense, also known as a deferred charge, is a cost you've previously paid but haven't yet received the products or services you requested. Deferred costs are classified as long-term assets in accounting because you typically get the products or services over a lengthy period of time, usually twelve months or more. An insurance premium paid in advance for the next insurance period is an example of a postponed expenditure.
Depreciation expenditures, often known as non-cash expenses, are the value lost on fixed assets over time. Because the loss is due to wear and tear or obsolescence rather than a monetary outlay, depreciation is a non-cash expense. There are several methods for determining depreciation expenditures depending on whether you expect depreciation to be consistent over time or irregular owing to, for example, a precipitous loss in value followed by a continuous fall.
Why are topside entry adjustments used
Topside entry adjustments are accounting processes used by parent companies to reflect the business activity of a whole company. These adjustments can be made to subsidiary company balance sheets to account for deferred revenue and accrued expenses. A parent company can also allocate its own income and costs to subsidiary companies. By using these techniques, topside entries can be minimized and inconsistencies avoided.
Topside journal entries are non-routine manual accounting entries. They are commonly used by companies to conceal fraud. They can be valid accounting methods because they allocate parent company expenses and income to subsidiaries. These methods are particularly susceptible to fraud, especially among companies undergoing mergers.
The most common purpose for a parent company to employ topside entry adjustments is to appropriately portray the firm's overall business activity in its financial statements. If the subsidiary firms' balance sheets, for example, reflect deferred income or accumulated costs, the main business' month-to-month financial status may be distorted. To better represent their genuine economic activity, the parent company might assign its own expenditures or profits to the subsidiary firms on their balance sheets.
How to ensure accurate topside entries
When it comes to topside entries, a lot of companies struggle with this issue. Topside entry adjustments are often used by parent companies to reflect the business activity of the parent company. For example, a subsidiary's balance sheet could have accrued expenses and deferred revenues. These adjustments can allow the parent company to allocate costs and income from the subsidiary to the parent company. The problem arises when the topside entries are not consistent and a company is left wondering which ones are correct.
The best way to avoid topside entries is to implement controls that limit who can make them. Some companies choose to generate a list of all recorded topside entries before posting their final financial statements. Another option is to limit the number of people with access to the system. This way, only one or two people can make any topside entries. The system also can be programmed to automatically reverse any temporary topside entries. However, there is a catch. Companies should use topside entries only in cases where they can't be eliminated completely.
1. Make a list of all the topside entries you've made
Make a list of all topside entries recorded in the accounting system before preparing your final financial statements. This might be advantageous because these transactions aren't recorded in the company's general ledger or any of the subsidiary firms' ledgers. An auditor can reconcile your financial accounts with a list of the entries made if you can create one.
2. Ensure that transitory entries are just that
If you've set any or all of the topside entry alterations to be temporary, make sure you undo them when they're no longer needed. If you make an adjustment because of an accumulated charge, for example, you no longer require that adjustment once the amount has been paid. Check to determine whether your accounting system can automatically reverse these entries once a certain amount of time has passed.
3. Limit the amount of persons who are permitted
It can also aid in limiting the amount of persons in your organization who are permitted to make topside entry changes. Choose one or two trustworthy individuals and provide them access to your accounting system. This guarantees that you are aware of who may be making topside entry modifications, and you are less likely to see misuse of the privilege.
4. Obtain clearance from upper management
Make sure you get senior management clearance for any topside entry revisions before posting them. This allows top management to be aware of any change and to ask questions about it before accepting or rejecting it. If you know that every topside entry change must be approved by senior management, you'll be more likely to make changes only when absolutely required.
5. Create topside entry policies in writing
Creating written norms surrounding how topside entries should be made is another technique to ensure consistent and precise topside entry adjustments. For openness and accountability, the policies might be included in the company's policies and procedures documents, which is accessible to all workers. You should be able to discover and remedy any problems or inconsistencies if personnel charged with executing topside input modifications follow these processes.
6. Request that the entries be reviewed by auditors
You may also invite internal and external auditors to go through the company's topside entry changes. It's conceivable that your auditors will be required to do so as part of their job. You may exhibit openness and promote correctness in both the documentation and execution of your procedures by providing them with the documentation you have of all the entries made, who made them, and supporting evidence for why they were made.
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