What Is the Month-End Close?
The month-end close is an accounting procedure that finalizes and closes out all financial activity for a business for the preceding month. This timeframe represents a well-defined period for accounting purposes. The process involves reviewing, documenting, and reconciling all financial transactions for that period. It is intended to ensure that all transactions have been properly accounted for, which allows the business to close the books on this financial activity and start a new month with a fresh set of records.
The month-end close is an integral process that helps a business provide accurate financial data on a regular basis. Reviewing and reconciling account information for the business on a monthly basis, or some other regular interval, supports business evaluation and forward thinking. It helps catch errors before they become costly and helps evaluate the company’s financial well-being as well as its progress in meeting performance objectives. The process helps maintain consistency and accuracy within the organization. It supports sound decision-making, strategic planning, and financial investment.
Performing a month-end close helps build confidence in the company’s financial data which is used to prepare its financial statements. The process ensures that the data in those statements is reliable and accurate. It also helps the business prepare for tax filings.
Like all deadlines, the month-end close can be a source of tension for some organizations. However, with proper preparation and systems in place, it is a source of reliable information and a sound business practice.
How Is a Month-End Close Performed?
The month-end close procedure involves several steps.
To perform a month-end close, the business’s accounting team will review, record, and reconcile all account information to confirm that the data is accurate.
Consistent and regular (daily, if possible) journal entries of all transactions that will impact the financial records will help avoid delays and reduce errors when it is time to perform the month-end close.
All departments whose activities impact financial records should follow similar procedures and maintain similar schedules to support the month-end close. Following a sound basis of accounting such as Generally Accepted Accounting Principles (GAAP) will maintain consistency across the organization and support the month-end close process.
With this information in place, the accounting team can perform the month-end close. One of the primary steps of the process is to reconcile subsidiary ledgers with the general ledger.
Journal entries of recurring monthly transactions must be performed at the time of the month-end close. This applies to such transactions as accrued expenses, amortization, depreciation, and loan interest.
The accounting team will reconcile cash accounts and balance sheets. They will review revenue and expense accounts. Bank account statements will be reconciled. Finally, the team will prepare financial statements. Once all accounts have been reconciled and statements are produced and reviewed by management, the accounting period is closed and no further transactions can be recorded for the month.
Why Is the Month-End Close Important?
A properly and consistently executed month-end close is a fundamental practice for a well-run business operation. It is important for all divisions within the business to adhere to the month-end close process to provide consistency and reliability within the operation. The process supports management review and decision-making, and it reflects the financial status of the company for outside interests, such as investors, lenders, auditors, and tax agencies.
How Long Does the Month-End Close Process Typically Take?
Typically, a business can complete the month-end close process in 4 to 10 days. The amount of time it takes to complete the process will depend on several factors including the size of the company, the volume and complexity of transactions that need to be recorded and reconciled, and the accounting systems that are used. Some activities can be recorded or reconciled more frequently than monthly to help speed up the process at month’s end.
The month-end close can be a pressure point for companies. There are expectations to produce the necessary documentation under a deadline so the business can close the books and make important financial decisions before moving onto the next month.
What Documents Are Needed for the Month-End Close?
All businesses differ, but there is some basic information needed for the month-end close. One of the biggest challenges for the process is having standardized information and gathering that information for closing.
The following documents and information are needed for month-end close:
Bank account statements
Petty cash total
Total fixed assets
Income and expense account
Is There a Checklist for the Month-End Close Process?
The month-end close will vary depending on the business, but there are some steps that are standard for most organizations:
Confirm all transactions for the month, including payroll and expense accounts
Document all revenue and incoming cash
Record all accounts payable and receivable
Check inventory levels
Close out petty cash
Close all subsidiary ledgers
Reconcile all accounts and statements, including bank statements