Financial consolidation involves gathering and combining data on financial transactions from disparate units within the business for a particular reporting period. Once the data is gathered, accountants can finalize the information and close the ledgers for the period.
Financial consolidation is significant because a business organization may have many units, departments, subdivisions, and/or subsidiaries, the data for all of which must be gathered and processed in a similar manner to generate consistent and meaningful financial statements for the parent company.
In some cases, this may involve more complex processing of data, such as currency conversions for companies that have overseas operations, or intercompany accounting for a business with subsidiaries or franchises. All financial activity for disparate units of a company must be consolidated into one central repository of accounting and reported in a consistent, uniform manner for the information to be processed in a meaningful way.
Financial close is typically performed at the end of an accounting period, either monthly, quarterly, or annually. This is an important process in which a business finalizes all its financial records for the period to produce important statements for investors, auditors, accountants, and managers. For any business with disparate units, financial close cannot be adequately performed before the consolidation of accounting information is completed.
The process of financial consolidation and close involves many steps.
Data Collection
Accountants gather trial balance data from all the disparate units in an organization or company and consolidate it into one central repository or centralized chart of accounts.
This can be a complicated process depending on the nature of the company and its many disparate units. Each of these may have its own general ledgers, and the information may be recorded in different formats. For companies with overseas operations, some ledgers may even record financial transactions in a different currency.
Currency Conversion
For accountants to make meaningful use of the information, currency conversion translates all ledger data into the same master currency. For example, if an American company owns a subsidiary operating in a European market, ledger data from that subsidiary must be converted from Euros to dollars as part of the consolidation process so all the information for the parent company can be processed together and consistently in the financial statements.
Intercompany Transactions
As part of the consolidation process, all intercompany transactions must be eliminated. Many businesses have multiple units that act independently but are owned by the same parent company.
These units have transactions with each other in the form of sales and purchases, loans, staffing, and other exchanges of resources that carry monetary value. Because a business cannot record a profit or loss by conducting business with itself, these transactions must be accounted for and ultimately canceled out to zero.
Reconciliations & Adjustments
During the consolidation process, reconciliations and adjustments must also be made. Reconciliation involves juxtaposing the business’s internal records against an external source to verify the business’s data is accurate. When discrepancies are identified, adjusting journal entries are made to correct them.
These correcting entries typically apply to incorrect entries, calculation errors, or overlooked transactions. Adjusting journal entries may also be made to record certain types of financial transactions that are not accurately or entirely accounted for through normal journal entries, such as depreciation, interest, or unearned income.
Closing
Once all data is gathered and the appropriate adjustments are made, accountants can begin the process of closing.
This involves finalizing all the accounting records for the period. This allows the business to produce financial statements, like the balance sheet, income statement, and cash flow statement. These statements are used internally and by investors, lenders, and auditors to analyze the financial status of the business.
Financial consolidation and close are essential for businesses with many disparate units for several reasons. The consolidation process enables companies to gather, streamline, and conform all their data into one centralized chart of accounts or general ledger. The process helps eliminate errors and discrepancies and ensures the quality, consistency, and uniformity of the business's data. Better data also enables the business to follow certain guidelines and practices, like the General Accepted Accounting Principles (GAAP).
Better data helps the business produce reliable financial statements that support analysis and evaluation of the health of the business.
Finally, following a consistent, recurring schedule of consolidating and closing also supports the reliability and accuracy of the business's accounting data.
The process of consolidating and closing the financial books for a business takes place on a consistent schedule that reflects the reporting periods for the business.
This is typically done on either a monthly, quarterly, or annual basis. Which schedule the process follows will depend on the company, the kind of business it engages in, and its accounting guidelines.
Businesses can face many challenges when consolidating and closing. The quality of its data can have a significant impact on the process. Manual data entry and/or a lack of a master database system or uniformity in the way data is gathered and stored can make consolidating, streamlining, and validating transactions a difficult process.
Lacking a consistent schedule and clearly defined roles can also lead to a murky and poorly executed process.
Finally, in a business with many disparate units, especially those that operate on a multi-national scale, poor communications and the lack of clearly defined guidelines that all units follow in a synchronized fashion will leave the business unable to effectively gather and consolidate data across all boundaries.
Schedule a demo with us and see how BlackLine automates and standardizes the reconciliation process to produce high-quality and accurate financial statements. Drive accuracy in the financial close by providing accountants with a streamlined method to verify the correctness and appropriateness of their balance sheets.
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