0:00 Introduction
0:26 What is the Month-End Close Process?
1:00 How do I complete the month-end closing?
4:05 How long does a month-end close take?
4:28 What accounts need to be closed at the end of the month?
Today’s video is all about the monthly close – what it is and how to do it. What is the Month-End Close Process?
So what is the month-end close process?
Closing the books is part of following good accounting principles. Essentially, it sets your numbers in stone by ensuring that nobody in your accounting department changes transactions from a previous month (or even a previous year) without you knowing about it. Including a monthly closing process in your regular accounting procedures ensures that your numbers are reliable, stable, and accurate.
How Do I Complete the Month End Close?
The month-end close involves verifying and adjusting your company’s month-end balances to ensure that your financial reports accurately reflect the business’s performance for the month.
Each small business is unique, so the specific tasks involved in closing the books vary from company to company, but there are a few common activities, such as:
Recording daily operational transactions. Ideally, you (or your accounting software linked to your bank account) are staying on top of bookkeeping and recording financial transactions as they happen rather than waiting until the end of the month. But make sure you’ve accounted for all:
Sales and revenue transactions (including cash)
Expense transactions
Accounts receivable (if you extend credit to customers)
Accounts payable (if you purchase from suppliers on credit)
Record monthly journal entries. Monthly journal entries are used to record unusual transactions that don’t affect cash and aren’t picked up by your accounting software’s bank feed. For example, you might need to post a journal entry to record depreciation and amortization, adjust a prepaid insurance account, post accruals, or recognize previously unearned revenue
Reconcile balance sheet accounts. Reconciling accounts ensures that all the transactions impacting an account are accurately reflected in your books. You do this by matching your numbers to outside financial records, such as bank statements, credit card statements, or loan statements. A bank reconciliation is one of the easiest ways to spot missing or incorrect entries since cash is part of most transactions. Depending on your business, you may also need to reconcile credit card transactions, accounts payable, accounts receivable, payroll liabilities, fixed assets, prepaid expenses, unearned revenue, loans and lines of credit, and other balance sheet accounts.
Review revenue and expenses accounts. Finally, review your revenue and expense accounts to ensure they’re accurate. You don’t have to perform an in-depth reconciliation for your income statement accounts as you do for balance sheet accounts, but a quick review of the trial balance — perhaps comparing the current month’s numbers to the prior month or prior year-to-date — can help you spot any glaring issues like a debit to a revenue account or misclassified expenses.
Prepare financial statements. Once you’re satisfied that your general ledger is accurate, you’re ready to prepare financial statements: a balance sheet, profit, and loss statement, and statement of cash flows.
Management review. Now, give those financial statements to management to review. Having senior management review the financial statements is a critical part of your company’s internal controls because the person reviewing the financial data and supporting documentation isn’t part of the preparation process.
Close the month in your accounting software. Once management approves the financial statements, you can close the month in your system. Closing the month prevents future transactions from being accidentally recorded in a prior period after the closing date.
How Long Does a Monthly Close Take?
In many businesses, there’s a lot of pressure to get the books closed as fast as possible — ideally within a business week.
Business owners and executives often use last month’s financial information to make decisions for the next month. So the sooner they get the numbers, the sooner they can see what worked last month, what didn’t work, and where they need to make changes going forward.
What Accounts Need To Be Closed at the End of the Month?
Your month-end closing process will vary depending on the type of business you’re in, your chart of accounts, and whether you use the cash or accrual method of accounting.