Month End Close
A Hallmark in Consistent, Accurate Financial Statements and Processes
Month-End Close
To help sustain and prevent your business from experiencing any financial issues, every business should have its finance and accountant team perform a month-end close process. The month-end or monthly close is generally time-consuming but is a hallmark of any business in presenting consistent and precise financial statements.
What is the month-end close?
A month-end close is an accounting procedure that ensures all financial transactions have been accounted for in the previous month. To ensure that they are giving accurate data, accountants will have to review, record, and reconcile all account information.
Though each company has its own predetermined set of activities and closing operations for its, there are some uniform functions to be performed, including:
- closing the accounting period on the business software or system
- recording un-entered invoices
- reconciling bank or credit cards
- insurance and mortgage entries
- reconciling any discrepancies in the inventory
- comparing the budget and the actual expenditure
- analyzing the data and preparing reports for the management and investors
Monthly Close Information
Before completing the monthly close procedures, the following information has to be collected:
Month-End Close Process
The month-end close process is a complicated procedure wherein you need to gather, analyze, reconcile, and adjust data from various systems. The complexity of the process in part lies in the collaboration needed in different functions to promptly complete their tasks.
During this period, you must balance the account and check if all transactions have been recorded in the right amounts. The month-end process is essential because it is a way of separating the current period to the next. This way, you can follow the matching principle, which requires that expenses, along with the total revenue, are recorded and recognized in the same period.
There are instances wherein some expenses may be paid out after the period that they are in, and it is the accountant’s responsibility to accrue for those. For example, if a company pays its sales commissions the month after they’ve earned it, the commissions need to be counted as commissions payable at the end of the month that the sales happened on an accrual basis.
If you follow the pre-ASC 606 revenue recognition standards, those commissions would be considered expensed as they are incurred. However, with the new rules, those commissions will gradually be paid off over the duration of the contract with the client.
For companies that have subsidiaries or international operations, they will have to consolidate the activities from the separate aspects of the business without including intercompany deals. In the end, only transactions made with companies or individuals outside the company will be reflected.
There is so much work to get done, but with advanced technology, accountants may work faster by starting on some of the tasks before the period concludes. Doing so will lessen the work that you have to do once the period ends.
Other than the sizable amount of work to do, managing the process and data make this procedure even more challenging. The number of reconciliations to finish, checklists to complete, documents to gather, and schedules to meet are substantial. Throughout the process, it will be difficult to see what’s finished or whether there are still adjustments to be made.
Your goal must be to reconcile as many accounts as you can each month. Those with high-risk accounts do so even more frequently. These are accounts that deal with high volumes of transactions, making them susceptible to being off by a notable amount. Some companies may also reconcile cash daily.
Best Practices for Month-End Close
It is incredibly challenging for one to ensure that all the figures in the report are accurate while working fast to meet the deadline. However, there are some ways that you can improve the result of your close process.
Accuracy
More important than closing fastTime Management
Manage well and be organizedKnow People
Know people in other departmentsRelationships Matter
Cultivate themMonth-End Close Checklist
| Cash |
|---|
| Reconcile bank accounts and confirm if the bank balance on the reconciliation corresponds to the actual bank statement balance. |
| Check if cash on trial balance is the same as the ending cash balance on the bank reconciliation. |
| Go through all outstanding checks and deposits that may need to be adjusted. |
| Undeposited Funds |
|---|
| Balance in the account must be reconciled to particular check deposits clearing in the next month. |
| Check if all undeposited funds from the previous month have cleared in the current month. |
| Accounts Receivable |
|---|
| Check if the total of the accounts receivable aging report agrees with the balance on the trial balance. |
| Find out if there are any past due balances that you need to write off. |
| Review if there are any unapplied credits in the accounts receivable. |
| Inventory |
|---|
| Compare total inventory to trial balance. Make necessary preparations and adjustments. |
| Find out if there are any obsolete inventory that you need to write off. |
| Fixed Assets |
|---|
| Identify all fixed asset additions and disposals |
| Reconcile depreciation schedule cost and accumulated depreciation totals to balance sheet account balances |
| Check if depreciation expense was properly documented |
| Reconcile Intercompany Accounts |
|---|
| Check if intercompany payables and receivables have the same data in each entity’s books. |
| Prepaid Expense |
| Check if balance corresponds to a supporting schedule and can be traced to transactions paid in advance. |
| Find out if the amount of monthly expenses is reasonable |
| Notes Receivable |
|---|
| Check if ending account balance agrees with the related loan amortization schedule. |
| Accounts Payable |
|---|
| Check if the total of accounts payable aging report is the same as the balance on the trial balance. |
| Review if there are any unapplied credits on accounts payable aging. |
| Accrued Payroll and Vacation |
|---|
| Trace account balance to supporting payroll data for vacation payable and payroll accrual for the period. |
| Specify the correct amount of days’ pay in accrual when you calculate liability. |
| Accrued Property Tax |
|---|
| Check if monthly accrual is 1/12 of the previous year’s expense. |
| Accrued Sales Tax |
|---|
| Balance in liability account agrees to sales tax reports for the following month. |
| Accrued Payroll Tax |
|---|
| Locate the payroll tax returns arranged for the coming month and tax payments made the following month for an existing month payroll. |
| Other Payroll Liabilities |
|---|
| Ascertain that balances in the concerned account accord with liabilities or withholdings that are not settled by payment by the end of the month. |
| Notes Payable Bank |
|---|
| Settle bank balance to book balance within the note account with amortization schedules or statements acquired from the bank or another lender. |
| Conclude whether or not monthly interest expense has been properly documented. |
| Equity |
|---|
| Confirm that the personal expenses of the owner are documented properly in the drawing or receivable account. |
| Confirm that the earnings that are retained or capital conform to balances on prior year tax return. |
| Expenses |
|---|
| Repairs – Inquire for expenditures which should be capitalized instead of expensed. |
| Supplies – Inquire for expenditures which should be capitalized. |
| Miscellaneous expense – this amount is to be made at the minimum; inquire for items which can be categorized to another account. |
| Miscellaneous income – recheck entries to confirm that no changes are required, such as the reclassification to another account. |
| Examine general ledger to confirm the correctness of the entry classification in other accounts. |
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