Simplify with this Month-End Close Accounting Procedure Checklist

​Month-end signals the need to tie all your journal entries together into a complete closing, which explains why it also strikes fear in the heart of business owners. Many owners dread this important step all month because they don’t have a clear picture of what they need to do to close correctly. They worry that they will miss an important step or miscalculate something that will substantially influence their financial documents.

Using a professionally generated checklist or spreadsheet template provides the accountability that you need to ensure the month-end closing is completed correctly. It also provides the checks and balances that many businesses lack between departments. Even small businesses can struggle to reconcile accounts between functions if there’s not a formalized process in place to fit the pieces together.

This checklist will help you simplify and streamline month-end close to give you more accurate financial reporting: 
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Cash

Tasks:
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• Record cash receipts
• Reconcile actual account ending balances against financial reports and bank statements
• Account for all checks in sequence and determine which checks have posted
• Review outstanding checks (more than 60 days old) to assess whether they need to be voided
• Verify restricted cash amounts are in order
• Flag unusual reconciling issues for easy identification the following month

Explanation:

Cash flow is probably the most important thing for small businesses to understand. Without a proper account of cash coming into a business, it cannot accurately gauge whether it has the quick assets needed to pay suppliers, cover expenses, and fund new projects.
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Estimating or misreporting cash and other liquid assets can quickly lead to a small business’s downfall. In fact, this is one major reason that businesses fail. A recent study published by Jessie Hagen of U.S. Bank determined that 82% of small businesses fail within the first 5 years due to “poor understanding of cash flow” or “poor cash flow management.” 

Undeposited Funds

Tasks:

• Record undeposited funds that should clear in the following month
• Compare the prior month’s undeposited funds to deposits that cleared this month

Explanation:
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Undeposited funds are those that are still in transit or have not yet been reconciled. These can include checks that have not yet cleared even though the revenue has already been recognized. Ensuring that undeposited funds are accounted for bridges the gap between financial report balances and bank account balances to keep revenue records honest.

Deferred Revenue

Tasks:

• Record new deferred revenue as a liability
• Determine if revenue recognition criterion has been met on current contracts
• Reconcile customer deferred revenue from the previous month with the current month’s revenue
• Analyze unusual revenue deferral situations

Explanation:

Unlike cash, which is an asset, deferred revenue is a liability because it’s money that has been received by a business before providing products/services to the customer. Deferred revenue must be properly accounted for to understand upcoming obligations. If a business has deferred revenue for products, it must be able to deliver those products in the coming months. Similarly, if a business has deferred revenue for services, it must have the capacity to provide those services as promised.
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When deferred revenue is not separated out properly from revenue which has already been earned, it stymies planning and can result in a business falling short of obligations. A business in breach of providing products/services which have already been paid for can face legal and social implications in the form of lawsuits and damaged brand reputation.

Short-Term Investments

Tasks:

• Generate investment statements
• Calculate and analyze realized and unrealized gains and losses

Explanation:
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Short-term investments are any investments that a company expects to convert into cash within a year (typically stocks and bonds). An accurate record of these is almost as important as accounting correctly for cash because short-term investments are basically seen as a secondary source of cash. They are not as liquid as cash, but they still provide the funding needed to pay business expenses and fuel growth as a quick asset. Keeping track of gains and losses on these investments provides an up-to-date picture of business liquidity.

Accounts Receivable (A/R)

Tasks:

• Post remaining invoices
• Record any unapplied credits
• Update recurring billing schedule with new business closed during the month
• Ensure AR aging report balance agrees with trial balance
• Add any non-standard billing terms to AR aging report
• Include collection status on past due receivables (or write them off)
• Authorize outstanding credit memos

Explanation:
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Accounts receivable (A/R) is the cash owed and promised from customers the company has yet to receive. While cash shows a business’s financial position at a snapshot in time, A/R demonstrates the future financial position of the business. Without a solid understanding of A/R, a business cannot forecast for the coming month or effectively collect on past-due balances.

Accounts Payable (A/P)

Tasks:

• Post invoices for items received
• Record liabilities for items received but not yet invoiced
• Match purchase orders, receipts, and invoices (and locate any outstanding items)
• Ask vendors for statement of accounts and settle any disputes
• Review A/P aging report for any non-standard terms or unapplied credits
• Reconcile open purchase orders with financial reports

Explanation:
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In the same way that accounts receivable represents money owed to a business, accounts payable (A/P) represents money that a business owes to its suppliers and vendors. A/P is made up of the bills that a business has generated but not yet paid, which means that it should be counted against cash and other assets to give a true picture of a business’s financial health. Not having a true accounting of what a business owes leads to poor cash flow management.

Inventory

Tasks:
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• Ensure all inventory activity was recorded on the general ledger
• Record any inventory that has been received but not yet invoiced
• Reconcile inventory figures against trial balance to find any discrepancies
• Evaluate perpetual inventory for figures that seem unreasonable
• Write off excess, obsolete, or planned end-of-life inventory
• Verify that inventory reserve does not need to be updated

Explanation:

While most people think of finished goods when they discuss inventory, it also includes all raw materials and any materials in the process of being transformed into finished goods.
Inventory is a business’s most important asset. Understanding how much inventory your business has and when it will sell (a key performance indicator known as “turnover”) aids in forecasting. It can also signal which assets are going to be written off as excess and obsolete in the coming months.

Small businesses often struggle to get inventory figures straight due to a lack of formalized procedures for counting and tracking inventory once materials are received, and goods produced. However, this is one of the smartest places that a business can invest its time and resources to improve.
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Without knowing precisely what your business has available to sell, you cannot make informed decisions related to marketing your products, hiring staff, or purchasing materials.

Expenses
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Tasks:

• Properly classify all expenses and update them according to their respective schedules
• Record new prepaid expenses as assets
• Calculate amortization on existing prepaid expenses
• Remove fully amortized items
• Ensure any accrued expenses can be linked to specific expenses
• Verify that expenses are being recorded in accordance with internal company policies

Explanation:

While accounts payable include items which have been billed for but not yet paid for, the category of expenses encompasses all costs of doing business – employee wages, leases, equipment, depreciation, raw materials, transportation, etc.

Writing off tax-deductible expenses helps a business lower its taxable income, which means paying less in taxes. However, expenses cannot be written off if expense records are inaccurate.  During an audit, incorrect expense information can lead to fines and other penalties.

Guessing or estimating expenses can also make profitability figures murky. Most commonly, businesses will underestimate their expenses (whether intentionally or unintentionally), making them look more profitable than they are. The result is a shaky foundation for business decisions and a high likelihood of becoming overextended.

Fixed Assets (also known as long-term assets or PP&E)

Tasks:

• Record fixed asset additions and disposals
• Verify asset classifications are correct
• Determine useful lives of assets and fixed disposal periods
• Record proceeds received from the sale of assets
• Reconcile balance sheet figures with depreciation schedule costs
  
• Analyze depreciation expense for reasonableness

Explanation:

Fixed assets are something that small business owners get confused about because they often assume they don’t have the same fixed assets that bigger companies have (especially if they don’t own the building). However, fixed assets can include everything from buildings and machines to office furniture, computer equipment, copyrights, trademarks, and vehicles.

Fixed assets are taken into account when looking for financing or determining financial health to sell a business, which is why it’s so crucial for businesses to depreciate fixed assets correctly.  

Do you need help with month-end close? Our experienced team of bookkeepers can complete this checklist and more. We provide customized accounting services for companies of all sizes. Contact Eric Moore, ASP Practice Leader here. 

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