Closing the books on a monthly basis can reduce work at year-end, and allow accurate financial statements to be reviewed throughout the year to identify any potential issues timely.  Additionally, management and boards can monitor benchmarks and budget activity.  Depending on different software, the closing process may range from an actual “close” function to checking items from a list for a “soft” close each month.

A checklist can be very helpful in this process.  The checklist could be created as the monthly close process is occurring to ensure completeness.  Then, test the checklist the following month and modify accordingly.  After a couple months of monitoring and modification, a streamlined closing process will have been created.

Who should be involved in the monthly closing process?  Knowing what processes need done will assist in ensuring the proper team is involved.

The accounts included in the monthly close process will vary based on the entity’s basis of accounting – accrual, cash basis, income tax basis, etc.  The following are some highlights of accrual-basis accounts to adjust on a monthly basis, including cash, accounts receivable and corresponding revenue, inventory, other assets, accounts payable, and various other accruals.  Additional accruals may exist based on operations.

After month-end, ensure all sales/revenue transactions have been recorded.  If the process to record sales transactions is done manually by the accountant, have they been recorded in the proper period?  For any revenue transactions completed where payment has not been received, accounts receivable should be recorded.  After the accounts receivable listing has been generated, it should be reviewed by management to determine if there are any collection concerns on slow-paying customers.  Ensuring the receivables listing agrees to the general ledger total is imperative.  Subsidiaries do not serve their purpose when the balances do not match the general ledger.

Depending on industry, consider counting inventory and making any necessary adjustments on the last day of the month.

Most likely, a business will not have received all of their bills needing paid within the first few days of the following month.  Management will determine how much time to leave the books open to record bills pertaining to the prior month and requiring payment in the current month.  When considering whether all bills have been entered, do not forget credit card transactions as well.  Be sure to have proper documentation to support all credit card transactions on the bill. 

Another important piece of the monthly close process pertains to journal entries.  Entries to consider include adjusting depreciation expense and prepaid insurance, if applicable.  As the amounts will likely not change, consider automating the entries, if software allows, which would help simplify the monthly closing process.

After all transactions have been entered, reconcile the bank statement.  The completed bank reconciliation should be reviewed by someone other than the preparer, to include verifying that figures per the reconciliation (bank statement balance and general ledger balance) agree to both the bank statement and the cash total in the general ledger.  Additionally, outstanding checks should be reviewed for age and consider re-generating the check if necessary or turning them over to the State as unclaimed property.  Deposits in transit should be reviewed for propriety to determine if they seem reasonable.  Additionally, changes to the cash account should not be made after the bank reconciliation has been performed.  This will cause the reconciliation to no longer agree to the general ledger.

After the above-described processes have been completed, consider any other entity-specific items needing tied out before the month can be closed.  Then, if software allows, close the month, or consider password-protecting the month in the software so accidental changes cannot be made.

Lastly, backups of data should be performed regularly to prevent data loss.

If you have any additional questions contact the Non-Profit Team at Ketel Thorstenson.