The month-end close finalizes and concludes all financial activities for the previous month, marking a well-defined accounting period. It guarantees the proper documentation and reconciliation of all transactions, enabling a fresh start for the new month. This regular practice not only prevents accounting errors but also supports strategic planning, decision-making, and financial investment.
Despite the potential stress associated with deadlines, a well-prepared month-end close instills confidence in a company’s financial data. It serves as a foundation for preparing reliable financial statements and ensures readiness for tax filings. With proper systems in place, the month-end close becomes a valuable source of dependable information, reflecting a sound business practice that contributes to organizational consistency and success.
In this blog, we will dive into what the month-end close process is, its importance, how to perform it, and best practices to close the month early.
What is the Month-End Close?
The month-end close process is a critical financial task performed by the accounting team to ensure accurate and timely financial reporting. The process involves reconciling accounts, reviewing transactions, making necessary adjustments, and preparing financial statements. Compliance with financial regulations and standards is a key outcome, vital for fiscal reporting requirements.
This method aids businesses in maintaining precise year-round records, facilitating informed financial decisions and operational efficiency. By reviewing balance sheets, intercompany trades, and reconciling documents such as bank statements, income, and expenses, the accounting team ensures accuracy. Recurring monthly transactions like accrued expenses, amortization, and loan interest are addressed through timely journal entries, enhancing the reliability of financial data.
Why is It Important to Perform the Month-End Close Process?
Fiscal Reporting Compliance: The month-end close is a crucial fiscal reporting requirement for certain companies, ensuring compliance with financial regulations and standards. This regular practice helps meet mandatory reporting obligations.
Accurate Record-Keeping: Conducting a month-end close allows accounting teams to maintain accurate and up-to-date financial records throughout the year. This continuous tracking is essential for informed decision-making and overall financial health.
Timely Error Detection: The month-end close process involves a meticulous review of transactions and reconciling records. This helps in the early detection and correction of accounting mistakes, preventing them from escalating into costly errors.
Preparation for Audits: By closing the books each month, finance teams ensure that their records are readily available in case of audits. This proactive approach simplifies the audit process and demonstrates transparency in financial reporting.
Efficient Tax Filing: Regular month-end closes prepare businesses for smoother and easier tax filing. Having organized and accurate financial records facilitates the preparation of necessary documentation for tax purposes.
Financial Visibility: Monthly closures create a consistent and clear view of a company’s financial information. This visibility enables businesses to track income and expenses, providing insights into spending patterns and facilitating better financial management.
Year-End Preparation: Monthly financial statements serve as building blocks for the year-end reporting process. Businesses that regularly close their books each month find the year-end process less daunting, as they have maintained ongoing visibility into their financial KPIs.
Essential Information Needed for Month-End Close
For the successful completion of the month-end close, accounting teams require the following key information:
- The overall sum of revenue generated during the month.
- Details regarding the business’s bank accounts, including balances and transactions.
- Information on the quantity and value of inventory, if the business deals with physical products.
- The total amount of funds in the petty cash fund is used for small expenses.
- Comprehensive reports summarizing the financial performance and position of the business.
- Documents detailing assets, liabilities, and equity to provide a snapshot of the financial status.
- The collective value of long-term assets owned by the business.
- Records of all sources of income and categories of expenses incurred during the month.
- A detailed record of all financial transactions, organized by accounts.
Ensuring these details are readily available facilitates a smooth and accurate month-end close process for the accounting team.
How Long Does It Take to Perform Month-End Close?
Completing the month-end close often takes a considerable amount of time for the accounting department. Over the years, depending on the company size and industry the process takes about 5 to 15 days, with 41% of organizations taking more than six days for this task.
Instead of trying to match the pace of faster-closing peers, a more effective approach involves gradually optimizing the month-end process. This optimization should focus on minimizing errors while reducing the time it takes to complete the close.
To make the month-end close faster, consider adopting a month-end checklist, automating repetitive tasks, enhancing communication and collaboration among teams, and identifying and resolving bottlenecks in the process.
Step-by-Step Guide to Month-End Close Process
To complete a month-end close, the accounting team of the business will carefully review, record, and reconcile all account information to ensure its accuracy.
For a smoother process, it’s beneficial to make consistent and regular journal entries for all transactions impacting financial records, ideally daily. This practice helps prevent delays and minimizes errors when the month-end close is executed.
All departments that influence financial records should adhere to similar procedures and schedules to support a seamless month-end close. Following established accounting principles like Generally Accepted Accounting Principles (GAAP) maintains uniformity across the organization and aids in the month-end close.
Armed with this information, the accounting team proceeds with the month-end close. A crucial step involves reconciling subsidiary ledgers with the general ledger.
During the month-end close, the team ensures timely journal entries for recurring monthly transactions, covering aspects like accrued expenses, amortization, depreciation, and loan interest.
Additionally, the accounting team meticulously reconciles cash accounts and balance sheets. They scrutinize revenue and expense accounts and reconcile bank statements. Finally, the team prepares comprehensive financial statements. Once all accounts are reconciled and the statements are reviewed by management, the accounting period is officially closed, and further transactions for the month are not allowed.
Let’s elaborate on the common steps involved in closing the month-end books:
1. Record Incoming Cash and Receivable
The step involves recording all cash transactions and updating accounts receivable records. It ensures that revenue is accurately reflected in the financial statements. Cash receipts, sales invoices, and any adjustments to accounts receivable are carefully documented.
2. Review Expenses and Payable
Businesses review and verify all incurred expenses during the month. This includes examining invoices, receipts, and other documentation. The accounts payable ledger is updated to reflect any outstanding payments or liabilities.
3. Reconcile Accounts
Reconciliation involves comparing and aligning various financial records to ensure accuracy. Bank statements, credit card statements, and other financial accounts are reconciled with the corresponding entries in the general ledger. Any discrepancies are investigated and resolved.
4. Review Fixed Assets
Fixed assets, such as property, equipment, and vehicles, are reviewed for accuracy and depreciation calculations. Any additions, disposals, or changes in value are accounted for. This step ensures that the organization’s balance sheet reflects the correct value of its fixed assets.
5. Prepare Financial Statements
Financial statements, including the income statement, balance sheet, and cash flow statement, are prepared based on the recorded transactions. These statements provide a comprehensive overview of the company’s financial performance and position during the month.
6. Count Inventory
For businesses that deal with physical products, a periodic inventory count is essential. This step involves physically counting and reconciling the actual inventory on hand with the recorded amounts in the accounting system. Adjustments are made for any discrepancies.
7. Evaluate Financial Documents
All relevant financial documents, including receipts, invoices, bank statements, and other supporting documentation, are collected and reviewed. This step ensures that the financial records are well-supported and compliant with accounting standards.
8. Review All Information for Accuracy
A thorough review of all financial information is conducted to identify and rectify any errors or inconsistencies. This step is crucial for ensuring the integrity of the financial data presented in the statements.
The month-end close process can vary depending on the nature and size of the business. For instance, companies involved in the sale of physical products may have additional steps related to inventory management, while service-oriented businesses may focus more on service revenue and project-based invoicing. The complexity of the process may differ for smaller companies with fewer accounts compared to larger multinational corporations dealing with numerous accounts and complex financial structures.
Roadblocks Faced by Accounting Teams in Month-End Close Process
Accounting teams face several challenges when carrying out a manual close process. These include:
Lack of Task Clarity: Team members may not have a clear understanding of tasks that need completion or those already finished.
Inaccurate or Incomplete Data: The presence of data that is either inaccurate or incomplete can impede the accuracy of the overall close process.
Lack of Standardization: The absence of standardized procedures can lead to inconsistencies and inefficiencies in the close process.
Undefined Processes: Processes that are not well-defined can result in confusion and hinder the smooth execution of tasks.
Discrepancies Between Numbers: Inconsistencies and discrepancies between different sets of numbers can create challenges in reconciling financial data.
Delayed Reconciliations: Reconciliations may be delayed due to errors, adjustments, and reclassifications, impacting the timeliness of the close.
Lack of Real-Time Data: The absence of real-time data can result in limited visibility and transparency, making it challenging to monitor progress and make informed decisions promptly.
Tips to Optimize Month-End Close Process
To enhance the efficiency of your month-end close, consider the following five tips:
Utilize Templates and Checklists
Instead of finding the process overwhelming, using templates and checklists for each step can significantly reduce the time spent on month-end accounting. Standardizing procedures enhances both speed and accuracy, as observed by a software company that reduced its month-end close from three weeks to just three days.
Consolidate All Transactions
It’s crucial to centralize all types of transactions in one place, including expenses and revenue. Utilizing spend management software with multiple user accounts allows your accounting team to verify transactions across the entire company. Labels can be employed to categorize and visually present spending more effectively.
Back-Up Your Data
In today’s digital age, reliance on paper is outdated. Even if you’re using digital accounting software, it’s essential to back up all documents securely. Losing access to data could double the month-end process, affecting other accounting procedures. Employ a reliable cloud-based system for secure storage.
Communicate Company Cut-Off Dates
Establish company-wide cut-off dates at the end of each month that signal the close of the current accounting period. Communicate these dates to all employees, allowing them to adhere to the deadlines. For instance, freelancers submitting invoices after the cut-off date may need to wait until the next billing cycle.
Automate Processes
Streamline your month-end close by automating essential processes. Automation accelerates workflows, from data collection to account reconciliation. It not only speeds up the process but also minimizes errors, making the sharing of financial statements more efficient.
With Peakflo’s Automated Reconciliation, accounting teams do not need to spend weeks on month-end-closing. It automatically syncs the data to your accounting software and eliminates mismatches and errors in bank statements and transactions.
FAQ
Q: What are the four types of closing entries?
The four types of closing entries generally include: transferring revenue accounts to income summary, transferring expense accounts to income summary, transferring the balance of the income summary account to retained earnings, and closing dividend accounts to retained earnings.
Q: How many days is month-end close typically completed within?
The month-end close is typically completed within 10 days of the end of the month, such as having a deadline for May closing on June 10th.
Q: What is the first step in the month-end close process?
The first step in the month-end close process is to gather all financial information, such as income statements, expense reports, and transaction details.
Q: What are the month-end close activities?
Month-end close activities involve gathering, reviewing, and preparing financial statements, followed by a final review.
Q: What do month-end reports entail?
Month-end reports summarize a company’s financial performance by reviewing statements like income statements, balance sheets, and cash flow statements, along with identifying key performance indicators.
Q: Explain the concept of the month-end close policy.
A month-end close policy involves reviewing, reconciling, and verifying all financial transactions and ledger aspects from the past fiscal year, ensuring consistency in expenses, income, revenue, assets, investments, equity, etc.
Q: What is the difference between year-end and month-end closing?
Year-end closing is similar to month-end closing, but it includes zeroing out income and expense accounts in the system.
