An efficient month end closing process improves internal control and reduces business risk.
Month end closing process is an accounting procedure followed by accounts department at the end of the month to close out the current posting period so that no entries can be posted in the closed period.
It includes processing of transactions, journal entries and financial statements at the end of each month.
Importance of Month-End Closing
- It enables accountant to generate accurate and consistent financial statements.
- It helps in early identification of any accounting and bank related issues rather than at the end of the year.
- Identifying missed and wrong posted entries throughout the year will lead to fewer adjustments at the year-end, saving time and money on compilations, reviews, and audits.
- Not having a month end closing process may cause significant errors in the financial records and financial statements, as well as allow irregularities and frauds to exist and continue throughout the year without notice
Different activities to be performed in month-end closing can include
Trial Balance Report
Month end closing start with a trail balance report. Accountant review the balance to identify any inconsistencies from what is expected, review the transaction details for any accounts he is uncertain of and note the adjustments that need to be posted.
Reconciliation of ledgers
Part of the closing process is to reconcile the subsidiary ledger with the general ledger. These include reconciliation of vendors accounts, credit cards, operating bank accounts, tax and insurance account, AR and AP balances etc.
It is recommend that to reconcile four main ledgers including cash & bank, inventory, AR and AP. Also out of these four ledgers, you should reconcile cash & bank account at first since cash & bank is part of most transactions. Once cash & bank accounts are reconciled and any necessary adjusting or journal entries are made the remaining balance sheet accounts can be reconciled.
Tracking the variance
Tracking monthly expenses against budget and explanation of significant variances is an essential part of monthly closing process. Analysis of actual expense against budget should be performed to get accurate position of company’s financials. Variance analysis can help in rectifying mistakes and help in posting necessary adjustments of prepaid & accrual of expenses.
In order to present a complete and accurate representation of the organization, monthly journal entries are essential for things such as accrued expenses, amortization and depreciation. An accountant reviews all general accounts to check every account has relevant entries and post necessary journal entries for the missing income or expenses.
Journal entries on the income side include income reclassification entries, writing off receivables, interest income entries, utility incomes and reconciliation entries.
On expense side, it may include accruals of missing income/ expenses, prepaid adjustment entries, amortization of expenses and reconciliation entries.
Once the accounting team is satisfied that the general ledger is accurate, financial statements can be prepared. These include balance sheet, statement of profit and loss, statement of shareholders' equity and statement of cash flows.
Monthly closing process completes with a detailed review of the financial statements by senior accountant and management. Financial review includes analysis of the statements and preparation of dashboards to be shared and discussed with management.
Closing of Accounting Software
Once management is satisfied with the financial statements, the accounting period is officially closed in the software preventing transactions being recorded in closed period.