Transitory liabilities are essential accounting tools that are used especially for the annual financial statements. They help to allocate income and expenditure to exactly the right periods. This process can help:
- to increase financial clarity,
- to avoid mistakes that could lead to accounting challenges
- and ultimately, to increase the accuracy of your financial reports.
“Understanding and correctly applying transitory liabilities can be a decisive factor for a company's financial success and clarity. ”
In Switzerland, there are certain special features when booking transitory liabilities compared to other countries that need to be considered. Swiss legislation and standards in particular play an important role in this, as they define the framework conditions for the correct accounting of these positions.
In addition, care should be taken to ensure that all relevant cash flows are precisely documented and that the accrual is carried out carefully to represent the actual financial condition of the company.
How do transitory liabilities work in Swiss accounting?
In accounting, accrual reporting is crucial in order to correctly represent the financial success of a company.
Transitory passives play an important role in this. They ensure that expenses are recognized in the period in which they are actually incurred. In Switzerland, the Code of Obligations (OR) and Swiss GAAP FER govern the treatment of these differentiations.
In this article, we would like to explain to you what transitory liabilities are, how to correctly record them in Swiss accounting and what you absolutely need to consider in order to avoid common mistakes.
What are transitory passives exactly?
Transitory liabilities are obligations for expenses that relate to the current financial year but whose invoices are not received until the following year. This would be the case, for example, if an employee works for you in December, but the payslip is not made until January and thus in the following financial year. You can enter this amount with transitory liabilities so that the expense is assigned to the correct financial year.
Am I required by law to make transitory liabilities?
In accordance Item 958b OR Accounting must be on accrual basis, which requires the correct recording of transitory items. Swiss GAAP FER 23 defines provisions and differentiates them from transitory liabilities by stressing that provisions are based on likely obligations with an uncertain amount or due date, while transitory liabilities are used for amounts already known.
Apart from the legal requirements, transitory liabilities are definitely worthwhile, as otherwise you may not be able to estimate how well a financial year went.
How do I account for transitory liabilities?
When recording transitory liabilities, expenses in the previous year are recorded and a liability is posted to the corresponding account. In the new year, the liability is cancelled as soon as the invoice is received and paid.
Application example: Your company has to have a mechanic come for a broken machine at the end of December, but he won't send the bill for 5,000 CHF until January.
Alternatively, the transitory position is often immediately refunded in full on 01.01. so that the expenses can be booked normally when the invoice is received.
What mistakes often occur with transient liabilities?
Confusion with provisions: It is important to separate transitory liabilities from provisions, as the latter are created for uncertain liabilities, while transitory liabilities represent known amounts. Provisions are therefore based more on assumptions and presumptions as to what expenses are pending (e.g. if you are involved in court proceedings and assume that this will result in more costs), while transitory liabilities represent amounts of which you already know.
Erroneous delimitations: Accurately document the boundaries and record all relevant bookings precisely. Incomplete delimitations cause discrepancies and falsify reporting.
Distinction of accounting accruals: Also pay attention to the distinction between active and passive billing accrual. Active accrual ensures accurate and transparent annual financial statements.
Transitory items at the end of the year: At the end of the year, all transitory items should be thoroughly reviewed and chargebacks should be made promptly. This prevents distortions in the new financial year.
Set accounts to zero regularly: Regularly zero out accounts for transitory assets and liabilities. Accounting software can be helpful as it automatically calculates period accruals.
What is the difference between transient active and transient passives?
While transitory liabilities refer to obligations that are to be paid in the future, transitory assets revolve around income or receivables that are to be taken into account in the current period even though payment is made later. A common situation for transitory assets is an advance payment that has already been received but whose full amount can only be recorded as income in the coming period. It is important to allocate the correct accrual so that both income and expenditure appear on the balance sheet on an accrual basis. A common misconception is that both types of transitory items are treated equally, which can result in incorrect bookings. The specific delimitations should therefore be closely reviewed to avoid financial inaccuracies.
How do I book transitory assets?
When you book transitory assets, you value income that was generated in the relevant period but has not yet been recognized. You start by determining the exact amount that goes over to next year. You can achieve this by calculating the amounts of income that has not yet been invoiced.
You then post these amounts to the account of the transitory assets. Assuming that you have income of 500 CHF that goes over to the next year, it is posted as debit to the “Transitional Assets” account and as credit to the income account.
A typical scenario could be a prepaid rental agreement where payment exceeds the current period. Here, the amount already paid but due for the following year is recorded as a transitory asset. Always keep your settings correct in your accounting software to ensure that accruals are accounted for correctly.
Do you use a simple accounting software Like infinity.swiss, it allows you to easily correct incorrect assignments. This is extremely helpful in ensuring the accuracy of your financial statements. Make sure to check all bookings carefully to avoid common mistakes when accruing them.
