Month-End Closing Process in

Accounting

Whether you’re a small business owner, a CPA, or part of a dedicated corporate

accounting team, the success of your business relies heavily upon certain
standardized procedures and the data they generate. This is particularly true for
the accounts payable department, where the month-end closing process must be
done properly to ensure the accuracy and completeness of your financial
statements and balance sheet. It’s neither glamorous nor particularly enjoyable
for many, but month-end close is essential to the health and happiness of not just
your accounting department, but your entire organization.

Traditionally, month-end closing has been regarded as a time-consuming and

occasionally frustrating process—a sort of “necessary evil” in bookkeeping. But by
taking the time to understand its particulars, implementing a clear and concise
checklist, and investing in the right technology, you can ensure your month-end

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close is quick and (nearly) painless, without sacrificing accuracy or completeness.

What is the Month-End Close Process?

At the end of every month, a business needs to review its accounts to ensure it
has properly recorded and reconciled all of the transactions that have taken place
during that specific month. This helps to ensure all accounting data is organized,
accurate, and complete. In turn, this simplifies and streamlines a number of other
accounting procedures, including month-end for each month to come and the
annual version of month-end known as year-end close.

Closing the books benefits your organization in several ways:

Accurate, comprehensive, and current financial records.

Provides context necessary for informed decision-making.
Simplifies tax filing.
Highlights areas in need of improvement and provides insights on how to
implement such improvements.
Streamlines audits.

A successful month-end closing process requires you to collect some essential

information. Increasingly, collecting and organizing this information has been
greatly simplified with help from tech tools such as comprehensive procurement
solutions. Cloud-based, mobile-friendly, and designed to help you achieve lasting
and continuous improvement through data analysis and process automation, these
software solutions give you complete and transparent access to, and control over,
all of your spend data. This improves the accuracy and completeness of all your
financial records, including accounts payable reports that drive your strategic
spend management and financial planning.

Every business is unique, and what works for a mega-corporation may not be in
the cards for a small business. That said, generally you’ll need the following items

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to perform a month-end close:

Total revenue
Bank account information
Inventory levels
Petty cash total
Financial statements
Balance sheets
Total fixed assets
Income and expense account
General ledger

Remember, your specific procedures may vary based on your industry, accounting
methods, available technology, etc. If you’re using a cloud-based, automated
solution such as Planergy, many of these data sources will already be connected,
organized, and ready for real-time access, manipulation, and analysis as needed.

The more complete and accurate your financial statements are:

the more likely you’ll be to have an accurate trial balance;

the more useful the insights they’ll reveal;
the more informed you’ll be when crafting strategies and making
crucial business decisions.

Month-End Closing Process Checklist

Collecting the necessary information is just the first step. To ensure your month-
end close is as smooth and painless as possible, it pays to follow a month-end
close checklist. A checklist will help you keep track of essential information and
minimize time-consuming errors and redundancies.

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1. Record All Incoming Cash
Whether it’s revenue, invoice payments, or loans, you need to record all the funds
your organization received during the month in question. Verify all invoices have
been sent. Cross-check to ensure the invoices you have sent have been paid.

If you’re using procurement and accounting software with automation and

artificial intelligence, then automatic three-way matching of purchase orders to
invoices to shipping documents will make this step much simpler—and faster.

2. Review Accounts Payable Records

Knowing when and where your team is spending money is at the core of effective
spend management. If you’re still using pen-and-paper accounting practices, you
may not have real-time records of all your purchases for the month.

As with Step 1, this part of the month-end close is much more transparent,
accurate, and swift if you’ve been recording and tracking spend automatically in
your accounting system. You’ll have much less risk of maverick spend or fraud
throwing a spanner in the works, too.

3. Reconcile All Accounts

Matching the entries in your financial statements with the corresponding entries
from vendors, banks, etc. is known as reconciliation.

Generally speaking, accounts fall into one of three categories:

Bank loans or notes

Prepaid or accrued accounts
Cash, checking, and savings accounts

Reconciling accounts payable and accounts receivable in this way is also known

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as the accruals process, as dictated by accrual-based accounting principles.

Accruals are adjusting entries made to ensure that all transactions that take place
within a given period (e.g., a month) are recorded properly.

In accounts receivable, accruals are used to report revenue (and corresponding

accounts receivable) earned during a given month that have not yet had their
transactions recorded.

In accounts payable, accruals record expenses, losses, and any associated

liabilities incurred during the month that have not yet had their transactions
recorded.

Let’s say your company has earned $200,000 in revenue this month, in the form of
customer purchases. Invoices have been issued, but payment isn’t due until the
15th of next month. So an accrual entry of $200,000 is added to record earned
revenue, offset by a corresponding entry to the Accounts Receivable account.
When the customer pays their bill next month, the cash entry of $200,000
generates a corresponding drop in Accounts Receivable.

On the other side, imagine your company purchased $5,000 in office supplies this
month, and received an invoice from the vendor. However, it’s not due until the
10th of next month, and that’s when payment is scheduled. So the $5,000
becomes a current liability and is placed in Accounts Payable, with a
corresponding entry in the Office Supplies expense account. Next month, when
payment is issued, an entry will be added to reduce cash by $5,000, along with a
corresponding entry that drops the Accounts Payable balance by the same
amount.

This process may be viewed by those outside the accounting department as time
travel or financial legerdemain. But the truth is it’s the simplest and most
effective way to ensure you can see, measure, and track expenses and revenue as
they occur, and provide accurate, comprehensive financial records for internal

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planning, internal and external audits, and tax preparation.

Centralized data management and close integration between your procurement

and accounting systems will streamline reconciliation and keep both revenue and
expenses from slipping through the cracks.

4. Don’t Forget Petty Cash

If your company uses a petty cash fund, that spend will likely become invisible
unless you have systems in place to track it. Manual accounting involves tracking
receipts and cross-checking them with withdrawals from petty cash. Better yet,
developing workflows that integrate automatic recording of all petty cash
purchases (scanning receipts, etc.) into the system will help you avoid skewed
totals due to forgotten or misplaced receipts, and make verification that much
simpler at month end.

5. Review Your Fixed Assets

Anything that adds long-term value to your business is likely to be considered a
fixed asset. Their lifespans extend through multiple periods, years, and even
decades. Examples of fixed assets include:

Buildings
Computer hardware and software
Furniture and fixtures
Intangible assets (intellectual property, brand names, Internet domains,
etc.)
Land
Machinery
Vehicles

Fixed assets are generally big-ticket items that readily convert to cash in the

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general ledger. Instead, they may generate expenses for your company in the
form of repairs, depreciation (for tangible assets), amortization (for intangible
assets), or impairment costs (if an asset dips below its net book value). For the
purposes of the month-end closing process, you simply need to record any of
these expenses that occur for each of your fixed assets.

6. Perform an Inventory Count

If your company maintains a physical inventory of materials or finished goods, a
monthly count will reveal any discrepancies created by error, damage, theft, or
spoilage. Mark-downs due to inventory shrinkage should be recorded as losses in
the month they occur.

Again, a centralized, cloud-based, and fully integrated

inventory/procurement/accounting system can be a lifesaver at this stage. Having
eyes on all your inventory, in real time, means less inventory shrinkage from
theft, damage, and loss. It also provides a virtual benchmark for your physical
inventory counts that can reveal areas in need of improvement or “blind spots”
that create needless ongoing expense. If your system supports barcoding, RFIDs,
or other information management protocols, physical inventory counts will be
even faster, since all items will be tracked in the system in real time.

7. Collect and Review Financial Documentation

Month-end close requires accurate and organized financial statements, including
your general ledger, balance sheet, and profit/loss statement. You’ll use these
documents to establish your listing of final balances for all accounts, known as
your trial balance. The purpose of the trial balance is to show that your financial
records are properly balanced, with a net balance of zero for all credits and
debits.

The more complete and accurate your financial statements are:

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 the more likely you’ll be to have an accurate trial balance;
the more useful the insights they’ll reveal;
the more informed you’ll be when crafting strategies and making crucial
business decisions.

A software solution with advanced data analysis and reporting support can
generate and populate these documents automatically, and then provide detailed
analyses you can use to plan for the months and years ahead with confidence.

8. Plan Ahead
Month-end close is an essential process that can be refined and streamlined to
achieve maximum efficacy with minimum error, waste, and disruption. Invest in
developing a fully integrated software environment to slash the “grunt work” of
tedious manual workflows and eliminate obstacles like rogue spend, fraud, and
human error. Establish firm closing dates, and develop processes to ensure all the
necessary information is available and complete when it’s time to wrap things up
for the month.

Closing the Books Properly Opens the

Door to Greater Success
Like all business processes, the month-end closing process has the potential to
help your company thrive, or hinder its growth and success. Investing in the
proper tools, developing effective processes, and ensuring you have the greatest
possible visibility of, and access to, your financial information, will help take the
sting out of month-end, and help you transform bookkeeping into value-building
with rock-solid financial data, actionable insights, and better decision-making.

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