Month End Close Process: Importance, Checklist Best Practices

The accounting department often takes a lot of time to complete the month-end close process. But, business leaders want to streamline and make the process faster as the month-end close numbers act as a starting point for the plans for the upcoming months. Closing the books each month can be a tedious process, but it is vital to ensuring the financial health of your company. The month end close can help you identify deviations from your financial plan early, so you can respond quickly.

Firstly, it helps to make sure that your financial statements are correct. These statements are used for many purposes, including receiving investment and making important business decisions, so you want the data to be right. Utilising a data automation tool like SolveXia will bring with it an unparalleled and organised process. This is because the automated system is designed to conduct reconciliation according to your desired frequency and standardises the process across your organisation.

Your accounting system should have software that generates these reports automatically. Ultimately, the goal of your finance and accounting teams is to create accurate financial statements for the month. If the balance in both statements matches and all the transactions are accounted for, we can consider the statement reconciled. Once reconciled, an account is marked “closed” for the month, indicating that we no longer need to make any changes to records before the ending date. However, balances generally do not match; they have to be adjusted due to accounting errors, banking errors, and refunds. That being said, all CFOs and accounting teams would agree that they wish the month end close process was more efficient.

But whether you’re a seasoned professional or a new accountant taking on the task of closing the books, having these practices in mind will help you hit the ground running. Once completed, carefully review these statements and make changes based on additional data, calculation errors, or budget variances. If you operate off a financial plan, compare the results with your forecast. You can also use ChatGPT in accounting to analyze financial statements with no identifying information for potential cost savings opportunities and unusual data trends. Now that you’ve got some knowledge under your belt about the month end close process, the next step is to create a checklist to streamline your closing procedures.

Mastering the Month-End Close Process in 7 Steps

Find professionals with solid track records (like us!) to handle your finance work. Routinely monitoring inventory levels will help you manage your working capital efficiently. If you overstock, you’ll trap money unnecessarily in inventory and risk wastage. Likewise, if you understock, you’ll risk production losses, missed revenue, and reputational damage. If you need more time to pay your suppliers, negotiate better credit terms in advance. Next, review if you’ve invoiced all your customers accurately and send any missing invoices.

1. The financial close doesn’t have to be a headache for the accounting team.
2. Finally, you must officially close the period in your financial system and distribute the financial statements.
3. For business owners with no expertise in this area, you might consider partnering with an experienced accountant, bookkeeper, or accounting firm for the chart of account set-up.
4. Once completed, carefully review these statements and make changes based on additional data, calculation errors, or budget variances.
5. Cash basis is an accounting method that is based on the cash coming into and out of a business.

Use this opportunity to search for mistakes, such as duplicate invoices that could lead to overpayments. The monthly process of closing your books is vital for many reasons. Process integrity checks are just one way to make sure that data is right. Organisations can also utilise analytical reviews, which help to verify that General Ledger account balances are reasonable.

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The process involves checking receipts, invoices, and other documents to match the client’s income and expenses to their physical records. But accounting for every transaction is key to avoiding discrepancies in your financial data. Prepare a bank reconciliation to reconcile your bank account with your financial https://www.online-accounting.net/how-to-calculate-sales-tax/ records. Bank reconciliations will also help you understand your cash situation and not overdraw your account. With account reconciliations, you’ll spot mistakes in your financial data and fraudulent transactions (if any!). Check if you’ve posted debit and credit entries accurately for all the transactions.

Data automation tools like SolveXia collect data from various sources in seconds and match records. If an anomaly exists, SolveXia will notify its user on the spot so that it can be investigated and rectified. Another way of performing a reconciliation is via the account conversion method. Here, records such as receipts or canceled checks are simply compared with the entries in the general ledger, in a manner similar to personal accounting reconciliations. Reconciliation is an accounting procedure that compares two sets of records to check that the figures are correct and in agreement. Reconciliation also confirms that accounts in a general ledger are consistent and complete.

If you’re struggling to keep up with your books and the month-end close process, you can outsource your bookkeeping to Bench. Get help from others in your business to address any issues right away, or hire someone who can help. Make time to review any critical matters, such as cash flow issues, weekly. Complete an inventory count and check the numbers against what you have in your books. If you find discrepancies, this is a trigger telling you that something needs to change with your processes. Work through your accounting systems to ensure you’re making invoice payments on time.

Accurate monthly financial reports help you improve transparency and track KPIs correctly. It serves as a mandatory fiscal reporting requirement for certain companies, ensuring compliance with financial regulations and standards. It helps in tax filing, preventing accounting errors, and getting an overall picture of the company’s cash flow scenario. Today, revenue definition closing the books means recording all expenses and revenues to get a complete and accurate financial record on the company’s accounting software. However, you can cut that down to as little as 5 days if your accounting team has access to automation software. These statements include your cash flow statement, balance sheets, and profit and loss statement.

Challenges of the Month End Close Process

Yet, it could be the case that expenses are paid out later than the period in which their matching revenue exists, which calls for accrual. Account reconciliation is particularly useful for explaining any differences between two financial records or account balances. Some differences may be acceptable because of the timing of payments and deposits.

If the indirect method is used, then the cash flow from the operations section is already presented as a reconciliation of the three financial statements. Other reconciliations turn non-GAAP measures, such as earnings before interest, taxes, depreciation, and amortization (EBITDA), into their GAAP-approved counterparts. It’s also possible to make a double-entry journal entry that affects the balance sheet only. Even though you must not sacrifice quality for speed, you must also plan ahead to meet your month-end financial reporting deadlines. If you are required to complete the closing process within a week, and you know that the timeline is unrealistic, then communicate it beforehand.

How Long Does a Month-End Close Take?

Journal entries of recurring monthly transactions must be performed at the time of the month end close. This applies to such transactions as accrued expenses, amortization, depreciation, and loan interest. The accounting team will reconcile cash accounts and balance sheets. But as you grow your business, automation can save you time and costly errors.

Record the receipts that you paid for using petty cash and make sure that your ending balance of cash is accurate. To “close the books,” account balances have to be adjusted to take them from a cash basis to accrual basis while adhering to the Generally Accepted Accounting Principles (GAAP). Reconciliation serves an important purpose for businesses and individuals in preventing accounting errors and reducing the possibility of fraud. The rules vary depending on whether the thief used just your account number or your physical ATM or debit card. In the first instance, you aren’t responsible for any transactions you didn’t authorize as long as you report them within 60 calendar days after your statement was sent to you.