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.