Many firms operate as a parent company (or holding company) with multiple subsidiaries. In such firms, there are adjustments made by the parent company on the accounting sheets of its subsidiaries during the preparation of the consolidated financial statements. This practice is referred to as top-sided journal entry and is allowed within the scope of the Generally Accepted Accounting Principles (GAAP). It is perfectly legitimate practice to allocate some of the parent company’s income or expense to its subsidiaries to accurately reflect business activity. However, it can also be used to improperly reduce liability accounts, increase revenue or decrease expenses. Typically, companies record them after the consolidation of journals or ledgers and right before preparing the financial statements. They are also not reflected in a company’s general ledgers and sub ledgers as those may happen after period end. If you are a CFO, you should be thinking about what controls you have in place to protect your firm from such risk.
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FA13 – Adjusting Journal Entries Explained
What are the types of topside entry adjustments?
There are five types of entry adjustments for which you might perform topside entries. They are:
Accrued revenues
Accrued revenue is income earned from your product or service that you have not yet received or processed. You might record this revenue when you make the sale and record it on your balance sheet as cash owed to you by the customer. While you havent yet received the income from the sale, you may need to record it to make sure it is included for the period in which you earned it. This type of adjustment is more common in industries where a customer contracts work that may take an extended period to fully complete.
Accrued expenses
An accrued expense is an expense that youve incurred and recorded, but have not yet paid. This expense may be based on a suppliers estimate since at the time the expense occurred you probably had not yet received an invoice. Examples of accrued expenses include supplies ordered from a vendor, interest payments on a loan and taxes. You may need to record the accrued expense even though you havent received an official notification that payment is due since you may not receive that notification until after the accounting period in which you generated the expense.
Deferred revenues
Deferred revenue is income youve earned before you have delivered the product or rendered the service. This adjustment might also be referred to as unearned revenue since youve been paid for work youve yet to complete. Rent pre-payments or subscription services are examples of deferred revenue. You might record these as an adjustment since you might supply the products or services over an extended period of time.
Deferred expenses
A deferred expense, or a deferred charge, is an expense youve already incurred but for which you have yet to receive the goods or services you requested. For accounting purposes, deferred expenses are considered long-term assets since you generally receive the goods or services over a long period of time, usually twelve months or more. An example of a deferred expense might be an insurance premium that you pay in advance for the upcoming insurance period.
Depreciation expenses
Depreciation expenses, or non-cash expenses, represent the value lost on fixed assets over an accounting period. A depreciation expense is considered a non-cash expense because the loss is due to wear and tear or obsolescence rather than a cash expenditure. There are different ways of calculating depreciation expenses based on whether you anticipate depreciation to be a steady rate over a number of years or irregular due to, for example, an initial dramatic drop in value and then a steady decline.
What is topside entry?
Topside entry, or topside journal entry, is an accounting practice where a parent company makes adjustments on the accounting sheets of its subsidiary companies. The parent company normally performs these topside entries during the preparation of consolidated financial statements. Topside adjustments normally dont flow down to the subsidiary ledgers, so the subsidiary companies are not usually aware of them, nor are they involved with making these adjustments. While the practice of making topside adjustments can be abused, its considered broadly acceptable within the Generally Accepted Accounting Principles (GAAP).
Why are topside entry adjustments used?
Perhaps the main reason a parent company might use topside entry adjustments is to accurately reflect the business activity of the company as a whole in its financial statements. If, for example, the balance sheets of the subsidiary companies have been showing deferred revenues or accrued expenses, these might give an inaccurate view of the overall business month-to-month financial situation. The parent company can allocate its own costs or income to the subsidiary companies on their balance sheets to better reflect their true business activity.
How to ensure accurate topside entries
If you want to ensure the accuracy of your topside entries, it helps to have steps in place that maintain accountability around these manual changes. Here are some strategies you can use to help manage the integrity of your topside entries:
1. Create a list of topside entries made
Before creating your final financial statements, produce a list of all topside entries recorded in the accounting system. This may be useful since these entries are not recorded in the companys general ledger, nor are they on the ledgers of any of the subsidiary companies. If you can generate a list of the entries made, an auditor can reconcile this against your financial statements.
2. Make sure temporary entries are only temporary
If some or all of the topside entry adjustments youve made are supposed to be temporary, make sure you reverse them when theyre no longer needed. For example, if you made an adjustment because of an accrued expense, once youve paid that expense you no longer need that adjustment. Check to see if your accounting system allows you to auto-reverse these entries after a period of time.
3. Limit the number of authorized people
It can also help to limit the number of people in your company who are authorized to make topside entry adjustments. Select one or two trusted people and grant them the necessary access rights in your accounting system. This ensures that you know who might be making topside entry adjustments and you might be less likely to see the privilege abused.
4. Get senior management approval
Before you post any topside entry adjustments, make sure you have senior management approval for each adjustment. This gives senior management awareness of each change and the opportunity to ask questions and accept or reject each proposed adjustment. If you know each topside entry adjustment has to be acceptable to senior management, you may be more inclined to only make adjustments when absolutely necessary.
5. Create written policies on topside entries
Another way to encourage consistent and accurate topside entry adjustments is to create written policies around how topside entries should be completed. The policies could be part of the companys policies and procedures documentation that is available to all employees for transparency and accountability. If those employees entrusted with performing topside entry adjustments follow these procedures, you should be able to detect and correct any mistakes or inconsistencies.
6. Invite auditors to review the entries
You could also invite auditors, both internal and external, to review the companys topside entry adjustments. Its possible that your auditors may need to do this anyway as part of their work. By providing them with the documentation you have of all the entries made, who made them and supporting evidence for why they were made, you can demonstrate transparency and encourage accuracy in both the documentation and the execution of your procedures.
FAQ
What is a topside entry example?
What is the entry in the journal called?
What is an entry example?
What is a financial entry?
