Month end closing

Month end closing
See also
Deposits in transit General journal entry Statement of affairs Reversing entry Post closing trial balance Closing the accounts Opening balance sheet Opening entries Accounting documents

Month end closing procedures "are necessary for purposes of reconciling the bank statement, accounts receivable and accounts payables and for making timely business decisions based on current operating results. The purpose of this policy is to ensure month-end closing procedures are performed in a timely manner" (B.A. Warn, E.W. Woodcock 2001, s. 321).

Month end closing procedures

The procedures for month end closing are as follows (B.A. Warn, E.W. Woodcock 2001, s. 321):

1. All paid documents with the fee entered for the last business day of the month must be sent to the Central Billing office on the first business day of the following month. A daily check should be carried out and to make sure that all paid documents have been settled, an agreement should be made between the planning system and the charges made;
2. Upon receipt, these payment tickets must be entered into the billing system;
3. All documents, invoices and receipts from the last day of the month must also be forwarded to the CBO (Central Billing Office) for posting;
4. Documents for the last day of the month must also be sent as soon as confirmation of the booking is received from the bank, which usually occurs 1-2 days after the date of payment;
5. After posting all payments and receipts for the month must apply the interface between the billing system and the general ledger. "This usually happens the night of the second business day of the following month";
6. "During the first two business days, all journal entries should be prepared and entered. The interface between the accounts payable and general ledger systems should also occur. It is essential to have all accounts payable bills for the month entered into the system by the second business day. For utility bills (and similar bills) that do not come until later in the month, a permanent accrual (based on average monthly expense) can be made with a "true-up" of the previous month's actual expense";
7. On the third business day of the following month, you can pre-check that entries made in the general ledger are made correctly and that there have been no mistakes regarding the sums of transactions made;
8. Any subsequent entries, corrections, and other annotations resulting from errors or inconveniences found during the review of the general ledger should be entered quickly enough to be able to run the final trial balance on the fourth business day of the month;
9. After checking the correctness of all entries and annotations made in the general ledger by the controller, you can create all necessary reports and spreadsheets on their basis, and then submit them for distribution;
10. "The week subsequent to the issuance of financial statements, a reconciliation of each balance sheet account should be performed. Any journal entries required as a result of this reconciliation process should be prepared for the following month. The balance sheet reconciliations will be reviewed and signed off by the Controller once they are completed".

Year end closing

Based on month end closing, the year end closing is created. The procedure for creating year end closing is very similar to the one used for creating moth end closing, but there is one difference - the commitments will be open for two weeks after the end of the year to ensure that all bills for the year have been closed (B.A. Warn, E.W. Woodcock 2001, s. 322).

Examples of Month end closing

• Reconcile bank statements: This involves comparing the bank's records of all transactions to the company's records. Any discrepancies must be investigated and resolved.
• Prepare financial statements: This involves reviewing, analyzing and summarizing the financial data for the month and preparing financial statements such as a balance sheet, income statement and cash flow statement.
• Review accounts receivable and accounts payable: This involves reviewing all customer accounts and vendor accounts to ensure accuracy. Any discrepancies must be investigated and resolved.
• Calculate depreciation and amortization: This involves calculating the amount of depreciation and amortization for the month and updating the general ledger.
• Review inventory: This involves reviewing the quantity and value of inventory and ensuring it is accurate.
• Close out payroll: This involves reviewing payroll records, calculating payroll taxes and preparing payroll reports.
• Perform budget analysis: This involves comparing actual results with the budget and analyzing any variances.
• Reconcile accounts: This involves reconciling all accounts to ensure accuracy. Any discrepancies must be investigated and resolved.
• Prepare journal entries: This involves preparing journal entries to record all transactions for the month.
• Perform internal audits: This involves reviewing all business processes and procedures to ensure compliance with internal policies and procedures.

Advantages of Month end closing

Month end closing provides several advantages, such as:

• The ability to reconcile accounts and ensure accuracy in the financials. By performing month-end closing procedures, businesses can ensure that their financials are accurate and up-to-date. This helps prevent errors and discrepancies in the data.
• The ability to assess the performance of the business in a timely manner. This information can be used to make decisions quickly and with confidence.
• Financial statements can be prepared in a timely manner. The financial statements are critical for external users such as investors, creditors and lenders. By having accurate and up-to-date financial statements, external stakeholders have a better understanding of the financial health of the business.
• The ability to identify areas of improvement. Month-end closing procedures can help identify areas of the business that are underperforming. This information can then be used to make changes and improvements to help increase the efficiency and profitability of the business.

Limitations of Month end closing

Month end closing procedures have their limitations; some of these include:

• Inability to make accurate and timely decisions: Month end closing requires the use of historical data and does not take into account any changes that may have occurred in the interim. This can make it difficult for businesses to make accurate and timely decisions.
• Inability to address urgent matters: Month end closing procedures can be lengthy and time-consuming. This can make it difficult to address urgent matters in a timely manner.
• Inaccurate financial information: The accuracy of financial information can be questionable when relying on month end closing procedures due to the lack of up-to-date information.
• Difficulty in adjusting to market changes: Because month end closing procedures are based on historical data, it can be difficult to adjust to changing market conditions.
• Lack of flexibility: Month end closing procedures often require a rigid set of procedures and are not easily customizable. This can make it difficult to address specific business needs.

Other approaches related to Month end closing

One approach related to month end closing is to reconcile the bank statement. This requires ensuring that all cash transactions are accurately recorded and that the amount of funds in the bank account matches the amount shown in the bank statement. Additionally, it is important to reconcile accounts receivable by verifying that all customer payments have been logged and properly credited. Accounts payables must also be reconciled by confirming that all invoices have been paid and that all liabilities have been accurately recorded.

Other approaches include:

• Reviewing all expenses to ensure they are properly accounted for and that there are no discrepancies.
• Examine all revenue, income, and cost of goods sold to make sure they are accurately recorded.
• Reconcile all physical inventory to the accounting records to confirm that all inventory items are properly accounted for.
• Analyze financial statements to come up with a financial report.

The month end closing process is an important procedure for ensuring that a business’s financials are up-to-date and accurately reflect the company’s profitability. By following the steps listed above, a business can ensure that their financials can be used to make timely and informed decisions.

References

• Bragg S.M. (2009), Fast Close: A Guide to Closing the Books Quickly Second Edition, John Wiley & Sons Inc., Hoboken, s. 111
• Cox L.A. (2015), Breakthroughs in Decision Science and Risk Analysis, John Wiley & Sons Inc., Hoboken, str. 63
• Warn B.A., Woodcock E.W. (2001), Operating Policies and Procedures Manual for Medical Practices, Medical Group Management Association, Englewood, s. 321-322

Author: Patrycja Czerwiec