The goal of any organisation should be the ability to produce timely and accurate financial statements within a reasonable period of time after the month has ended.
The financial statements are critical to management in their ability to understand the financial health of the organisation and allow management the opportunity to make decisions in a timely manner.
To reach the point of financial reporting many details must take place throughout and at the end of a month in order to record the financial transactions of the organisation. All of these details can be managed most efficiently when processes and procedures are put in place. Ideally, they are well thought out, documented and incorporate all appropriate departments of the organisation. The process should also consider internal controls (such as segregation of duties), GAAP and the reporting needs of management. The finance team must rely on obtaining source documents to record information into the accounting system and therefore the flow of information is critical.
Keeping in mind that the goal is to create timely and accurate financial statements, any procedures that can be incorporated into the daily operations will facilitate a quicker month closing process. Organisations may find that if they work closely with other departments in the organisation that some of the tasks and reporting required can be completed by other departments to create further efficiencies.
Generally speaking, closing the month entails the following major tasks:
- recording all financial transactions
- reconciling balance sheet accounts
- review of income & expense accounts
- preparing financial statements
- review of all of this work, usually by the CFO or Director of Finance. I
- In essence, the monthly closing is a mini-audit that closes the books for the current month.
To create a monthly close process, the major tasks can be broken down into a series of detailed steps.
Record daily operational financial transactions
While this may seem straight forward, this is an area that can cause work to back-up and create a delay at month-end. Ideally activity should be recorded when it happens, incorporating as much of the work as possible into daily operations rather than waiting until the end of the month.
Some of this work often makes sense to be done by departments other than accounting. For example if the organisation is large enough to have an accounts payable department, daily or weekly reports can be generated and accounting can reconcile these on an on-going basis. Accounts payable may also be able to take a first look at items such as outstanding checks and vendor credit balances.
Reconciliation of accounting system modules/subsidiary ledgers
Accounting systems often have integrated modules such as payables, sales (gifts for nonprofits) or investments to manage a specific function of the company. Part of the closing process is to reconcile the subsidiary ledger (SL) with the general ledger.
Organisations may also have stand-alone software that will need to be reconciled as well with the general ledger. An example of this may be a nonprofit organisation that has several sources of revenue such as programs, retail and philanthropy. Their systems may integrate programs and philanthropy but retail could have a stand-alone system for point of sale and inventory control. It becomes important to incorporate a daily system that works between retail and accounting to capture, reconcile and record summary journal entries from the retail system to the general ledger.
Record monthly journal entries
In order to present a complete and accurate representation of the organisation, monthly journal entries are usually necessary for things such as accrued expenses, amortisation and depreciation. Many systems can automate recurring journal entries.
Reconciliation of Balance Sheet Accounts
One of the easiest ways to locate missing or incorrect entries is to reconcile cash since cash is part of most transactions. The first accounts that should be reconciled are the cash accounts. Organisations with numerous monthly transactions will benefit from also reconciling cash on a daily or weekly basis. This adds the benefit of knowing how much cash is on hand at all times.
Once cash accounts are reconciled and any necessary adjusting or journal entries are made the remaining balance sheet accounts can be reconciled.
Review of Revenue & Expense Accounts
Finally, a review of the revenue and expense accounts is key to look for reasonableness that these accounts are accurate. Revenue is often linked to a subsidiary ledger and therefore has been reconciled. Check expenses to see if they have been recorded in the correct accounts, the correct period and that accruals and prepaid are accurately reflected.
Prepare Financial Statements
Once the accounting team is satisfied that the general ledger is accurate, financial statements can be prepared. Many organisations can generate these statements through their accounting systems, while others will need to run reports and compile date, which is often transferred to an Excel document.
Another useful review is comparing actuals to budget from the Statement of Activities (Income Statement).
The final stage occurs when all of the documentation required to produce the financial statements, along with the statements themselves, are given to the CFO or Director of Finance for review. This process is a critical part of internal controls, as the person reviewing the statements and corresponding back-up typically is not part of the process in preparing this information.
Close accounting systems for the month
Once management is satisfied with the financial statements, the accounting period is physically closed in the system preventing future transactions from inadvertently being recorded in a period that has been reported on.
In summary, written procedures that maximise the resources of the organisation will lead to more efficient processes and timely/accurate financial reporting. Analysing current software systems, staff resources and internal controls are an important part of this process to ensure that systems are in place throughout the organisation. The result will be an organisation that consistently produces timely and accurate information that can be used to obtain a complete picture of an organisation’s financial status.