For companies to be successful, their finances must be properly managed. This means their financial transactions and account information must be regularly reviewed, recorded, and reconciled. One way to ensure that your bookkeeping is done properly is to conduct month-end accounting.
What Is Month-End Accounting?
Month-end accounting is when a business closes out all its financial activity for the preceding month. To ensure that all of a company’s financial activity is accounted for each month, companies must review, record, and reconcile their financial transactions. While the financial close and reporting process may seem extensive, the benefits are massive when done correctly.
The Month-End Accounting Process
The month-end accounting process is a checklist of steps finance and accounting professionals follow to ensure that they accurately track the financial activity of their businesses. To properly conduct month-end accounting, follow the month-end closing checklist outlined below.
1. Record All Income Cash and Accounts Receivable
One of the first steps in month-end closing is recording all company income along with any accounts receivable, or outstanding invoices, owed to the company. Forms of income typically recorded in this step of month-end closing include revenue, investment income, invoice payments, loans, and debt repayments.
2. Review and Record Accounts Payable
Accounts payable is money that a business owes vendors or suppliers for goods and services provided on credit. For example, money that a business owes a landlord to lease an office space is an account payable.
Other common types of accounts payable include money that a business owes vendors/suppliers for transportation and logistics, raw materials, power/fuel, products and equipment, licensing, or additional services such as assembly or contracting. To gain a comprehensive view of how profitable a business is, finance and accounting professionals must review, record, and reconcile all accounts payable and accounts receivable.
3. Reconcile Accounts
In finance and accounting, reconciliation refers to the action of comparing transactions and other forms of financial activity to supporting documents. For example, comparing the records of customer payments or a company’s own loan payments to those listed in bank statements is a form of account reconciliation.
Accounting teams typically reconcile the following accounts: cash, checking, and savings accounts, bank loans, as well as prepaid or accrued accounts. Account reconciliation is a vital part of the monthly closing process.
4. Review and Reconcile Petty Cash Usage
Petty cash is any discretionary money that businesses use to pay for small expenses. An example of petty cash is the money that a business sets aside to pay for office supplies or employee lunches. When reviewing and reconciling a company’s petty cash usage, ensure that the receipts match the records of the business’s petty cash fund.
5. Review and Record Payments to Fixed Assets
Fixed assets are major purchases or long-term investments that add value to a business. For example, buildings, equipment, cars, and furniture are fixed assets despite the fact that they depreciate in value over time.
It’s important to record any payments that your business has made toward fixed assets when completing your month-end closing. You should also record any money spent repairing fixed assets in your month-end closing.
6. Conduct Inventory Count
Finance and accounting professionals should conduct an inventory count each month that they are closing their books That way, they can keep track of what items their businesses need to purchase more of. Accuracy is highly important when conducting inventory counts, as inventory shrinkage can lead to revenue loss.
7. Review Revenue and Expense Accounts for Accuracy
Reviewing revenue and expense accounts for accuracy is a critical step in a month-end closing checklist. Take time to validate and accurately record all forms of revenue and expenses. This includes accruals and prepaid expenses.
8. Collect and Review Financial Statements
A major step in any month-end closing checklist is collecting and reviewing financial statements. One example of financial statements businesses should collect and review are those in the business’s general ledger or record of ongoing transactions.
Finance and accounting professionals should also collect and review balance sheet accounts when completing the monthly closing process. Balance sheet accounts are financial statements for any company with assets, liabilities, or shareholder equity.
Profit and loss statements must also be collected and reviewed when conducting month-end accounting. These documents track a company’s revenue, expenses, and any other forms of profit or loss.
Cash flow statements, or financial documents that track any cash that has entered or exited a business, should also be collected and reviewed during month-end accounting.
When collecting and reviewing financial statements, it’s wise to organize them through accounting software. Doing so allows finance and accounting teams to easily find and use those financial statements to file taxes, perform audits, or conduct future monthly accounting procedures. Having all your business’s financial information organized also makes it easier to catch possible financial issues like overspending.
9. Review Month-End Accounting for Accuracy
Everybody makes mistakes. That’s why it’s important to have more than one finance or accounting professional review the final month-end closing books. If, for some reason, there is no one else who can check your month-end accounting work for accuracy, double or triple-check your own work.
10. Apply What You Learned
Conducting month-end accounting allows business leaders to identify financial discrepancies within their organizations. This, in turn, provides business leaders with the opportunity to change the way that their businesses run.
For example, if, when conducting month-end accounting for a company, you discover that the business has been overspending the past month, you can help curtail future financial losses by immediately making changes to the company’s spending budget. Performing a month-end close can also help organize a business’s finances so that accounting can run more smoothly the following month.
Benefits of Month-End Accounting
There are a variety of benefits to month-end accounting procedures. Some of the benefits of completing a month-end closing checklist include:
Identifying Financial Discrepancies
As briefly mentioned earlier in the article, reviewing, recording, and reconciling a company’s finances enables finance and accounting professionals to identify financial discrepancies within the business. Examples of such discrepancies include cost inflation, overspending, and inventory mismanagement.
Attracting Potential Investors
When finance and accounting professionals perform month-end closing procedures, every part of the company’s finances is accounted for and organized. This builds the trust and authority of the business. As a result, the business may spark the interest of professional investors, lenders, and business partners.
Seamless Tax Filing
Because collecting and reviewing financial statements is a fundamental step in a month-end closing checklist, filing taxes as a business is much easier after conducting a month-end close.
Effortless Audits
Similar to its effects on filing taxes, month-end accounting makes it easier for a business to perform audits.
More Accurate Financial Records
Conducting a routine month-end closing helps businesses maintain accurate and up-to-date financial records.
Increased Time Savings
By helping businesses maintain accurate and up-to-date financial records, month-end accounting also helps businesses save time.
It Makes Running a Business Less Stressful
The ultimate benefit of going through the steps of a month-end closing checklist is that it makes running a business less stressful. Month-end accounting helps ensure that all of a business’s financial statements and transactions are regularly and accurately recorded.
How to Prepare for the Month-End Accounting Process
While the idea of completing a month-end closing checklist may appear daunting, it doesn’t have to be. To make the month-end accounting process easier, consider the following:
Maintain Good Records
Month-end accounting is much easier for businesses that maintain accurate, up-to-date records of their finances. So, do yourself a favor and be diligent about your day-to-day bookkeeping. Doing so will save you stress in the long run.
Have a Closing Date
Set daily and weekly deadlines for finance teams participating in the month-end accounting process. Doing so will help keep the people conducting your accounting up-to-date with their bookkeeping.
Even when it’s time to conduct a month-end closing, make sure that it doesn’t take more than 10 days to complete. That way, bookkeeping never falls behind.
Automate Your Bookkeeping
Using best-of-breed, Excel-centric financial close software to automate your bookkeeping can help finance and accounting teams save time. It can also reduce the risk of making critical accounting errors.
Communicate
For an accounting team to properly record all aspects of a company’s finances, they must know everything that goes on in the company. Therefore, the accounting team must regularly communicate with all the other departments within an organization.
How to Enhance Your Month-End Closing Checklist
There are always ways to enhance your month-end closing process. To improve upon your existing month-end closing checklist, consider the following:
Automate Your Bookkeeping
As mentioned earlier in the article, automating your bookkeeping can save you time and effort. Automation may also reduce the number of accounting errors that you make, which greatly enhances the month-end accounting process.
Integrate Databases and Consolidate Systems
Having too many accounting databases and systems can be confusing and cause records to get lost. Therefore, it’s best to integrate your accounting databases and systems.
Back-Up Your Data
Regardless of what accounting system your team uses, it’s important to back up your data. That way, if your accounting system shuts down, you won’t lose all of the sensitive financial information you’ve worked so hard to collect and record.
Upload Data Into Accounting Systems in Real-Time
One way to easily enhance your month-end closing process is to upload all data on any financial transactions your business makes in real time. By doing this, you will reduce the amount of data that you’ll need to collect and record when the time comes for you to complete your month-end closing checklist.
Start Preparing for Month-End Closing Today
As time-consuming as month-end accounting can be, its benefits make it worthwhile. This is especially true when you consider how month-end accounting can improve a business leader’s decision-making. For example, insights gleaned from month-end accounting procedures can help business leaders determine their future budgets.
A properly executed month-end close can also help business owners decide on what investments make the most sense for them. Moreover, business leaders can identify areas of their companies needing improvement.
If you are a business leader or a finance or accounting professional searching for additional guidance on overcoming your month-end accounting issues, check out this article on the common reasons organizations struggle with financial close. Don’t be afraid to get advice from other accounting professionals as well. There are always ways that you can enhance your month-end closing process.
