Don't Let the Numbers Surprise You – Week 3: Month-End Close: Finish the Month Before Moving Forward
Entering bills, sending customer invoices, and recording transactions are important parts of bookkeeping, but they don't mean the month is finished. A proper month-end close brings all the pieces together to make sure the books are complete, accurate, and ready for review.
1. Record and reconcile all transactions.
First, make sure all transactions for the month have been entered into the accounting system. Then complete the bank and credit card reconciliations. This means comparing the transactions recorded in your books against your actual bank and credit card statements, marking each transaction that cleared the account, and identifying any missing, duplicate, or incorrect entries. The goal is to make sure the activity reflected in your books agrees with the activity reported by your financial institutions.
2. Review accounts receivable and accounts payable.
Make sure customer invoices have been issued for all completed and delivered work. When it comes to AR also review outstanding customer balances to identify overdue payments. On the accounts payable side, verify that vendor bills are recorded accurately. A good practice is to request vendor statements and compare them against your accounting records to confirm that all bills, payments, and credits are reflected. Any discrepancies should be investigated and resolved prior to closing the books.
3. Record necessary adjusting journal entries.
Not every accounting adjustment comes from an individual bill or invoice. Some entries are needed to properly allocate income and expenses to the correct accounting period or department. Examples include recognizing the portion of customer prepayments (unearned revenue) that has been earned during the month, allocating prepaid expenses over the periods they benefit, recording accrued expenses, and posting depreciation on fixed assets. These adjustments help ensure that income and expenses are reflected in the correct period.
4. Prepare and review the financial statements.
Once the reconciliations and adjustments are complete, prepare the financial statements, including the Profit & Loss Statement and Balance Sheet. Review the results, look for unusual fluctuations, and calculate your expense metrics. Where reliable industry benchmarks are available, compare your results to industry standards to identify areas that may need further investigation or attention. Significant differences can be early warning signs that something deserves a closer look.
5. Close and lock the accounting period.
After the month has been reviewed and finalized, close the accounting period and set a closing date or password restriction. This prevents unauthorized users from making changes to previously reviewed transactions and financial data. Any necessary changes afterward should be handled by an appropriately qualified accounting professional and properly documented.
Why does all of this matter?
Month-end close brings together everything we've discussed in this series: knowing what's happening in your business, reconciling your accounts, and properly closing your books.
Bookkeeping is more than just data entry. It's about validating, completing, reviewing, and protecting financial information so business owners can make informed decisions and others can rely on the numbers.
Accurate financial statements serve purposes beyond internal management. Banks use them when evaluating loan applications, fractional CFOs when developing financial strategies, and tax professionals when preparing tax returns, to name only few.
Don't just record the numbers. Finish the month, review the results, and make sure your financial information is ready to support your next business decision.
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