Accounting

What is the Month-End Close Process?

Mar 23, 2022 | By Michael Whitmire

Complete and timely financial statements are the most powerful strategic tool for any organization. They help business owners measure progress towards goals, and they’re essential for performing an accurate cash flow projection for the future and making business decisions. 

To use your financial information as an effective planning and strategic tool, you need to get into a regular cadence of closing your books. In this post, we’ll first give an overview of the closing process and provide you with a month-end close checklist. Next, we’ll go into the specific steps for closing the books in QuickBooks, NetSuite, and Sage Intacct. 

What is the Month-End Close Process?

The month-end close process is a set of steps that closes your books at the end of the month to set your numbers in stone. It’s impossible to accurately track performance if those numbers bounce around when someone finds invoices or bills that weren’t recorded on a timely basis, or when someone changes transactions from previous months (or even previous years). Including a monthly closing process in your regular accounting procedures ensures that your numbers are reliable, stable, and accurate. 

Flowchart for Month-End Close Process

The exact steps in the month-end close process may vary from company to company, depending on the type of accounts and transactions that make up its financial data. However, the process generally follows a four-step process. 

The flowchart below provides a visual overview of the month-end close process and the key activities that take place in each step.

Record Close Analyze Report
Ensure all revenue and expense transactions have been recorded in the ERP Reconcile cash, checking and savings accounts, petty cash fund, and credit card accounts Generate an adjusted trial balance and draft income statement, balance sheet, and A/R and A/P Aging Reports. Prepare management, FP&A, and external/SEC reporting
Record accrued liabilities, including payroll, employee vacation, notes payable interest expense, and taxes Reconcile prepaid accounts Review analysis with stakeholders Assemble required documentation for internal and external auditors
Review fixed assets and perform an inventory count Reconcile intercompany accounts to ensure payables and receivables match between both businesses
Post journal entries for depreciation and amortization

How Do You Do a Month-End Close?

One of the bedrock accounting principles, closing the books is the process of verifying and adjusting month-end balances to prepare reports that reflect the company’s true performance over a specific period. Closing the books is an essential part of the accounting cycle and serves as a cutoff point for transactions: they either occur before or after the closing date. This cutoff point is created by zeroing out the balances in income statement accounts so those accounts can start fresh at zero for the next period. 

Income statement accounts are temporary: they collect data for a specific period, whether that’s a month, quarter, or year. At the end of that period, the income and expense accounts balances are transferred to retained earnings on the balance sheet. Over on the balance sheet, the accounts are permanent, so they reflect the aggregate of financial activity of the entity since inception. 

Our accounting textbooks (remember those?) made the close sound so easy: close period income and expenses to Income Summary, and close Income Summary to Retained Earnings. Done. 

But as we’ll see below, there’s a lot more to closing the books than making just a few journal entries. 

How Long Does a Month-End Close Take?

There’s a lot of pressure to get the books closed as fast as possible every month. Business owners and executives use last month’s financials as a starting point to make business decisions for the upcoming month. So the sooner they get final numbers, the sooner they can see what worked last month and what didn’t work so they can start making changes for the current month. 

Thanks to technology, the close has been getting steadily faster, according to surveys by Ventana Research.  In 2014, 58% of companies surveyed took seven or more days to close, and 28% needed eleven days or more. Only 29% were closing within four days. But in their 2019 survey, only 49% needed seven or more days, and nearly half (46%) were closing in four days. Sixty-one percent were closing the books within six days.

Those numbers are a bit faster than APQC found in 2018, where the median close of 2,300 organizations was 6.4 days. The top 25 percent in that survey were closing in 4.8 days or less, while the bottom 25% needed 10 or more days. 

Closing faster sometimes means a tradeoff between speed and accuracy. Using estimates rather than exact calculations can shave hours or even days off the close. In many cases, those estimates are not materially different from the actuals. However, when it’s time to close the fiscal year, the actuals will need to be determined. That means that the year-end close will likely take at least an extra day or two. 

What are the 4 steps in the closing process?

Income statement accounts track activity over a specific period, so those balances need to be zeroed out, or closed, so that the next period can start fresh from zero. Another account is used to keep track of dividends paid out over the period, and it also needs to be zeroed out. The closing process involves four steps to make that happen.

  1. Close revenue accounts to Income Summary.  Income Summary is a temporary account used during the closing process. First, the balances in all the revenue accounts are transferred to Income Summary. 
  2. Close expense accounts to Income Summary. After expenses are closed to Income Summary, the balance in that account is net income for the period.
  3. Close Income Summary to Retained Earnings. Since Income Summary is a temporary account, that balance needs to be closed to Retained Earnings to track the company’s cumulative earnings.
  4. Close dividends to Retained Earnings. Cash distributions or dividends paid out to owners during the period need to be closed out to Retained Earnings so that the balance reflects the earnings that the company retains for future needs.

Most accounting software packages perform this process invisibly when a box is checked to close the books. All you really see is the end result — a set of balanced financial statements, including a Balance Sheet and Profit & Loss Statement, and a general ledger ready for the next accounting period. 

Best Practices for a Month-End Close Process

Besides having a well-thought-out plan and month-end workflow, let’s review some best practices that can help make your end-of-the-month processes go as smooth as possible.

  1. Set a goal. Is your organization meeting the average time-to-close of 6.4 days? Whether your process takes longer or you’re getting your close done in less time, set a goal to shave a day off of the process next month or next quarter. 
  2. Don’t sacrifice quality for speed. Closing the books can be time-consuming, and while it’s good to have a goal of reducing your time to close, you should never cut corners. Doing so can result in errors or even missing signs of fraud.
  3. Hold a pre-close meeting. Gather your team for a pre-close meeting to discuss your schedule and timeline. Ensure everyone knows what tasks they’re responsible for completing. This is also a good time to discuss issues that arose during last month’s close and make a plan for mitigating them, if possible.
  4. Automate wherever possible. Technology can streamline many of the time-consuming and manual month-end close tasks. So take advantage of tools that assist with collecting data in real-time, reconciling accounts, and running calculations to speed up the process while avoiding errors.

Common Challenges in a Month-End Close Process

For many accounting teams, controllers, and CFOs, the month-end close involves long hours and added stress. After all, day-to-day responsibilities don’t get put on pause during the close — you’re expected to handle both.

Identifying common challenges in the process is the first step to eliminating (or at least minimizing) the headaches that your month-end close can bring. Do any of the following sound familiar?

  • Team members don’t know what needs to be done.
  • Managers don’t know the status of various tasks.
  • Supporting documents are in people’s email, on their local drive, or not organized properly in a shared drive.
  • Account reconciliations and other workpapers and Excel spreadsheets contain errors because someone made changes to the trial balance.

All of these issues can be overcome with close management software.

Month-End Close Checklist 

Whatever accounting system you use, the following checklist covers most of the tasks that need to be completed before you can close the books. A month-end close template — like the one found here — can get you started on developing the best process for your organization. 

  1. Confirm all transactions for the period. 
    • Post or import payroll. Make sure all timesheets have been submitted and approved.
    • Verify that all accounts payable bills are in the system, including recurring bills.
    • Verify that all accounts receivable invoices are in the system and that all recurring invoices have been generated.
    • Verify that all expense reports have been submitted and approved and all invoice payments have been recorded.
    • Post or import all credit and debit card charges.
  2. Post closing entries in the general journal
    • Review and post revenue recognition from schedules.
    • Post deferrals, accruals, and reversals.
    • Post depreciation, amortization, and any other revenue or expenses from other modules.
    • Verify that all entries that should have been entered actually were entered.
  3. Close sub-ledgers, if any
    • Check for any transactions that are in draft form, recurring transactions that have failed, and transactions still awaiting approval.
  4. Perform all reconciliations
    • Reconcile all bank accounts to bank statements. High-volume accounts may be easier to manage with weekly or even daily reconciliation.
    • Reconcile all charge accounts.
    • Reconcile AP aging to sub-ledger and subledger to General Ledger.
    • Reconcile AR aging sub-ledger and subledger to General Ledger.
    • Reconcile Prepaids, Fixed Assets, Work in Progress, and any Deferred Revenue accounts.
    • Reconcile actual inventory to inventory in the General Ledger.
  5. Run review reports 
    • P&L Variance or Budget vs. Actual.
    • Investigate any unusual changes.

Once all of these tasks are completed, you’ll be ready to follow the specific instructions for closing the books in QuickBooks, Netsuite, or Sage Intacct. 

How Do I Close a Month End in QuickBooks? 

When you set the year-end in Intuit QuickBooks, the program automatically zeroes out all the income and expense accounts and transfers the balance of net income to Retained Earnings when your fiscal year ends. So it looks like your books are closed for the year, but this isn’t a formal close process. This is just a bookkeeping reset for the next year. Anyone with access to your QuickBooks file can go in and change something in the previous month or year, and you might not find out until it’s time for your CPA to prepare your tax filing. 

For many small businesses, performing a formal year-end close may be enough. But fast-growing businesses with ambitious goals may need to establish the cadence of a monthly closing process so that decision-makers have a reliable baseline for future strategy.

A best practice is to formally close the books using the following four-step process and to include a password to set your numbers in stone. 

Step 1: Review Your Accounts

Sign in to QuickBooks as a master or company admin. Complete all the  tasks in the checklist above. Once you have all your numbers nailed down, you’re ready to close the books. The process is a bit different depending on whether you’re using QuickBooks Desktop or QuickBooks Online, so we’ll go through those close processes separately. 

Step 2: Close Your Books in QuickBooks Online

  1. Go to Settings (the gear in the corner) and select Accounts and Settings.
  2. Select the Advanced tab.
  3. In the Accounting section, select Edit.
  4. Select the Close the Books checkbox.
  5. Enter a closing date.
  6. Select the option to “Allow changes after viewing a warning and entering a password” if you want to require a password before any changes to the closed period can be made. This is highly recommended.

Step 3: Close Your Books in QuickBooks Desktop:

  1. From the Edit menu, choose Preferences.
  2. On the Company Preferences tab, click on Set Date/Password.
  3. Enter the closing date.
  4. Select the option to “Allow changes after viewing a warning and entering a password” if you want to require a password before any changes to the closed period can be made. This is highly recommended.

How Do I Close a Month End in NetSuite?

Like many ERP packages, the NetSuite ERP has a formal closing process. NetSuite’s integrated Period Close Checklist includes all the steps that need to be completed before a period can be closed, but like most things in accounting, it’s not as simple as checking boxes on a to-do list. 

After completing all the tasks in the checklist above to make sure you have your numbers nailed down, you’ll set the process in motion. First, go to Setup > Accounting > Manage Accounting Periods and select the period you want to close. That brings up the Period Close Checklist. NetSuite requires that these steps be checked off in a specific order. Depending on your organization and your organization’s business processes, you may find that completing them in a slightly different order works better. 

Let’s go through those items one by one. 

  1. Lock A/R. The first three items on this list — Lock A/R, Lock A/P, and Lock All — must be completed before any other step can be completed. Before you can lock accounts receivable, the sales and revenue numbers have to be finalized. This means all invoices must be issued and all calculations for revenue recognition must be complete. 
  2. Lock A/P. Once all vendor invoices have been submitted to accounts payable for payment, A/P can be locked. If any material invoices are received after the processing deadline, most companies will accrue those payables with a journal entry to be reversed in the next period. 
  3. Lock All. This step locks the general ledger. Before this can be done, the accounting team must record all recurring and standard journal entries. Once the GL is locked, no more entries can be recorded. 
  4. Resolve Date/Period Mismatches. NetSuite allows periods to close with discrepancies between the date and the period, but this can cause financial reporting headaches down the line. Make sure that any mismatches are appropriate and intended. 
  5. Review Negative Inventory.  This usually indicates a process problem that must be fixed. Otherwise, cost of goods sold will be calculated as zero. Setting up a saved search to look for negative inventory items well before period end can save time at closing. 
  6. Review Inventory Cost Accounting. This ensures that all inventory costs have been picked up. This is another area where a saved search can save you time at month-end. 
  7. Review Inventory Activity. Abnormal inventory fluctuations may indicate a process issue. Saved searches can help you identify problems and resolve them before they blow up. 
  8. Create Intercompany Adjustments. At this step, expenses are allocated across consolidated companies. The finance team should evaluate whether NetSuite should automatically set up Intercompany Adjustment Journals. 
  9. Revalue Open Foreign Currency Balances. GAAP requires foreign currency balances to be revalued at the rate at the end of the period. 
  10. Calculate Consolidated Exchange Rates. If you are in a NetSuite OneWorld environment with subsidiaries with different base currencies, NetSuite maintains a list of consolidated exchange rates. 
  11. Eliminate Intercompany Transactions. On a consolidated basis, only transactions with the outside world should show up, so transactions between parents and subsidiaries must be eliminated. 
  12. Close Period. Finally, when all of the above steps have been completed, the books can be closed. Once this is done, no one can make any changes to the general ledger. 

Once the books are closed for the month, any changes will require unlocking that period. This can happen if something gets overlooked, or if your CPA recommends some adjusting entries. To unlock a period, go to Setup > Accounting > Manage Accounting Periods and bring up the checklist for the period you want to reopen. After clicking on the green arrow on the Close line, click on the Reopen Period button. This brings up a box that requests a justification for reopening a closed period.  After you’ve made your changes, you’ll have to repeat the closing process for any periods you had to open to make those changes. 

How Do I Close a Month End in Sage Intacct?

The monthly closing process in Sage Intacct is a simple affair, provided you’ve completed all the tasks in the checklist above. You’ll also have to resolve any transactions with problems. This includes transactions in Draft state or that are waiting approval. If you have recurring transactions, those sometimes fail when a change is made to the system, so you’ll want to verify that those all went through correctly. Once everything is correct, it’s just one step:

  • Close the Books
    • Under General Ledger > Books > Close.

If you need to reopen the books later, that’s pretty simple also. To open the books in Intacct, go to General Ledger > All > Books > Open. Choose the Entity and the Period you want to open. In this window, you also have the option to open the sub-ledgers for AR, AP, Cash Management, Time & Expenses, or to leave them closed. Click on Open and the books will be open. Be sure to close the books again after you make your changes so no one else can inadvertently make changes to a closed period. 

Get Your Numbers Lined Up Before Your Close

But there’s a lot that needs to be done before those few closing entries can happen. Balance sheet accounts need to be reconciled. Bank reconciliations have to tie to balances on the closing date. Accruals need to be posted. Revenue recognition for the period has to be squared away. Fixed assets have to be updated. Journal entries for depreciation and amortization need to be calculated and posted. Intercompany transactions need to be eliminated. Deferred revenue has to be reclassified. Depending on your organization, you may have additional adjustments, allocations, and accruals to make. All of these steps need to be part of your regular accounting procedures. 

Most accounting teams use some sort of month-end close checklist and have some sort of month-end close process. On one end of the spectrum are the accountants, controllers, and CFOs who keep it all in their heads and use a lot of manual processes. That can work for a while, but as the accounting department grows, that process can become total chaos. Tribal knowledge abounds, and tasks can be easily overlooked, especially if a key person is out for a few days. 

On the other end of the spectrum are accounting teams that follow a well-thought-out and optimized process with interactive checklists, workflow tools, and who leverage all the automation they can. These teams are using everything their accounting system has built in plus a few additional tools like FloQast. 

Wherever your team is in that spectrum, a comprehensive checklist that includes all the processes and assignments is a must in order to streamline the closing process. Ideally, your checklist should make it easy to swap tasks between team members to keep the process moving efficiently. 

Close the Books Like a Pro

Now that you’ve got the general month-end process down, you can start divvying up the tasks among your team members. Starting with a complete checklist can help you get started as you optimize your processes to speed up the close. Keeping in mind that many of these tasks must be completed sequentially, you may be able to speed up the close by completing some tasks in the current period, and not waiting until after the end of the period to get started. Remember, the sooner you get the books closed, the sooner you can do the cool stuff in accounting.

Ready to find out more about how FloQast can help you tame the beast of the close?

Michael Whitmire
As CEO and Co-Founder, Mike leads FloQast’s corporate vision, strategy and execution. Prior to founding FloQast, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. He began his career at Ernst & Young in Los Angeles where he performed public company audits, opening balance sheet audits, cash to GAAP restatements, compilation reviews, international reporting, merger and acquisition audits and SOX compliance testing. He holds a Bachelor’s degree in Accounting from Syracuse University.

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