Whether you are new to the financial closing process or have been doing it for years, you know this task can be a daunting one. If you have never done a financial statement close it is best to understand the process and what you are trying to accomplish. When closing the books for a month/quarter or annual period the accountant is reviewing/reconciling the balance sheet and income statement and preparing to reset the income statement for the next period. An easy way to help streamline this process is to create a checklist that lists out the different processes that need to occur to accurately close the books for a monthly, quarterly or annual close.
Creating checklists for all three periods would be a best practice as a monthly close likely does not require all the procedures needed in a quarterly or annual closing. However, if the quarterly or annual specific checklist items are minimal, you may have one checklist with a notation of those procedures that are only required if it is a quarter or year end. It may be very helpful to include instructions on how to perform the process and include screenshots so that if someone goes on vacation or is out unexpectedly another person could easily perform the task. Additionally, including due dates and the person responsible for each task on the checklist can help ensue the closing process is completed by any deadlines the company may be facing. Lastly, many accounting software allow you to setup recurring and reversing journal entries. Setting these journal entries up in your software is extremely useful and efficient as some journal entries are the same each month and just need to be posted or updated.
Below are a few of the processes that could be part of your company’s potential closing checklist:
- Reconcile all bank accounts to ensure all cash transactions have been recorded.
- Reconcile the subsidiary ledgers such as the AR Aging and the AP Aging to the general ledger. If the subsidiary ledger does not agree with the general ledger, review the general ledger for potential journal entries that may have been manually posted.
- Compare sales activity by customer to the prior twelve-month period. If your company does not have a consistent customer base, other comparisons such as sales by workday or even a month over month sales activity comparison is extremely useful to ensure all sales have been recorded. After review, prepare a journal entry to accrue any non-invoiced sales for the period.
- Prepare the journal entry to amortize/capitalize prepaid assets and track prepaid assets on a schedule.
- Prepare the journal entry to book depreciation for fixed assets.
- Pull a detail of all accounts payable invoices posted during the month and at least six months prior to see if any missing invoices need to be accrued.
- Prepare journal entries for accruals that need to be entered such as payroll, sales tax, etc.
- Reconcile debt accounts to lender statements to ensure all borrowings and payments have been recorded.
- Create a monthly income statement (P+L) and compare account balances in each account to prior months, any large fluctuations should be investigated to verify a prepaid asset or fixed asset did not accidently get expensed and look for other potential mis-postings or missing accruals.
The financial close process can be a stressful time every month. You help reduce that stress by creating a detailed checklist to make sure all the needed processes are completed by the appropriate person and in a timely manner. While the list above is by no means comprehensive it is a good starting point that can be expanded to fit your company.
If you have any questions about this or any other accounting process, please contact your Henry+Horne advisor.