Closing the books monthly is no easy feat. Here are some ways to help your team cycle through the month-end close process efficiently.
An Entrepreneur’s Guide to the Month-end Close Process
Closing the books at the end of a particular period is fundamental in accounting. Learn about common procedures regarding month-end and quarterly book closing in this guide.
In accounting parlance, "closing the books" pertains to the monthly, quarterly, or year-end activity of finalising all business reports. The "book" refers to ledgers and journals that track and generate financial statements.
The closing of books at the end of an accounting period offers companies insightful data about their financial status and accurate financial forecasts.
Most organisations leave the book closing to their accountants. However, entrepreneurs must have basic knowledge of the process to ensure their business's financial stability. This article will explain the standard procedures for doing month-end and quarterly book closing.
A Quick Guide To The Month-end Close Process
The month-end close process can be a challenging endeavour for those who are not well-versed in accounting. Here is a short guide to closing your books.
1. Post the journal entries to the general ledger
The month-end close process begins by transferring all recorded entries from the journal to the general ledger.
An accounting journal is the book of original or first entry—the two-column journal details all the company's transactions in chronological order.
The general ledger, otherwise known as the book of secondary or final entry, is used to sort and store the amounts from all your corporate transactions. It is often used to prepare financial statements. There are five main accounts in the general ledger, namely: 1) Assets, 2) Liabilities, 3) Equity, 4) Revenue, and 5) Expenses.
Accountants typically use the double-entry accounting method to record transactions such that for every debit entry, there must be a corresponding credit entry of the same account.
2. Prepare a trial balance and worksheet
A trial balance is a record prepared to prove the accuracy of the ledger. The ledger is said to be "in balance" when the totals of the debit and credit balances in the ledger accounts agree. If the debits and credits did not "balance" or are not identical, this might signal an error between the journal and trial balance that accountants must resolve. Meanwhile, a worksheet is prepared after the trial balance to expedite the creation of financial statements and the posting of adjusting and closing entries.
Accounting software is known to eliminate the occurrence of these errors through automation. Modern accounting teams are starting to grow accustomed to using accounts payable software that integrates with an accounting system to ensure that payable entries or transactions are transferred to the accounting books in real-time, ensuring faster reconciliation during month-end close.
3. Record adjusting entries
Some end-of-period adjustments are necessary before you can close your books. Enter: adjusting journal entries. Adjusting entries are journal entries prepared to reflect the balances of an accounting period properly. The most common types of adjusting entries are accruals and deferrals.
While most accounting teams prepare their entries at the end of an accounting period, they may be prepared whenever an accountant deems appropriate.
4. Prepare the adjusted trial balance
The adjusted trial balance lists the account titles and balances, ensuring that the total amount of the debit balances equates to the total amount of credit balances even after adjustments have been made. The adjusted account balances will soon be recorded in the financial statements.
5. Generate the financial statements from the worksheet
The financial statement is a formal report that informs stakeholders such as managers, creditors, prospective investors and government agencies about the business's financial status. There are four (4) basic reports that organisations need, mainly: 1) income statement, 2) statement of capital, 3) balance sheet, and 4) statement of cash flows. Financial statements are typically prepared at least once a year.
6. Record and post your closing entries
Closing entries prepare you for the next accounting period as the balances are zeroed out from a temporary account and transferred to a permanent account. Income statements and drawing accounts are temporary accounts, while the owner's capital accounts are permanent ones.
Accounting systems automate the process of closing entries within a few clicks, but this is only possible with accurate recording of transactions. An accounts payable solution ensures that all payables are recorded at the point of transaction, removing manual data entry and errors that cause delays in the closing process.
7. Generate a post-closing trial balance
The final trial balance will only contain balance sheet entries since you've already zeroed out income and expense accounts. You should check again if the total debits and credits agree to ensure your general account ledger balances are accurate. Your books are ready for the next accounting cycle if everything is in order.
It's Time To Automate Your Month-end Close
As a business owner, it's always good to know how your financial statements are generated and what they contain. After all, your stakeholders will be relying on you to present how your business is doing based on your financial statements. You might find it easier to delegate these tasks to professional accountants. However, many automation tools are available to hasten and streamline your accounting process.
Spenmo is an end-to-end payables software that brings internal spend management, automated bill payments, approval workflows, and expense reconciliation into an integrated view. It integrates with your accounting software of choice to automate the expense reconciliation process, reducing the time you need to close your books by about 90%. Book a demo today!