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Understanding Financial Close: What is It & What is The Process?

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What is the Financial Close Process?

The financial close process is a recurring system in which an accounting team verifies and adjusts account balances at the end of a designated period and before the accounting cycle closes. It starts with documenting the journal entry for each transaction and ends with preparing data for the next period.

The entire process produces financial reporting that is representative of a company’s true financial position. The CFO can then use this information to inform stakeholders such as lenders, investors, management, and regulatory agencies. 

To increase efficiency, you must examine the entire month-end close process. When a business only focuses on certain parts, you might miss red flags and bottlenecks that could create more issues down the line. 

The 4 Steps in the Closing Process

The financial closing process involves reviewing account balances and reducing or zeroing out, temporary accounts before the accounting cycle closes. Here are the four steps to make that happen:

  1. Close revenue accounts to income summary (income summary is a temporary account)
  2. Close expense accounts to income summary
  3. Close income summary to retained earnings
  4. Close dividends (or withdrawals) to retained earnings

The Month-end Financial Close Process

When it comes to successful budgeting, finance teams need to perform an accurate and systematic month-end close. This workflow is a series of steps a business must follow to review, record, and reconcile financial information. 

Financial close management streamlines your accounting data and ensures all transactions for the month have been accounted for. This paints a clearer picture for more informed decision-making and forecasted sales. 

Aggregating Data

Prior to closing your books, it’s important to have all the information needed in front of you. Some documents and data to collect include:

  • Bank account information
  • All revenue totals
  • Petty cash fund amount
  • Inventory and stock levels
  • Balance sheets
  • Financial statement information
  • Total fixed assets
  • General ledger data
  • Income and expense account information

Always keep in mind, each company’s month-end accounting procedures will vary depending on the type of business, accounting method, and series of accounts. 

The Month-end Closing Process

When an accounting period comes to a close, there are specific steps to take that will ensure you cover all the bases.

1. Record all incoming cash.
2. Update the accounts payable.
3. Reconcile accounts.
4. Review all petty cash.
5. Look over fixed assets.
6. Count stock and inventory. 
7. Organize and review financial statements
8. Check expense and revenue accounts.
9. Review data before closing.
10. Prepare for the next month.

  1. Record all incoming cash

    When performing an end of the month financial close, you must record the funds received during those past four weeks. Incoming cash you might need to document includes:

    Invoice payments

    Compare invoices with your records to ensure you aren’t missing any customer payments. Make sure you have sent an invoice to every customer where work was performed during that month. This is also a good time to run a trial balance and contact any customers for late payments. 

  2. Update the accounts payable

    Chances are you haven’t recorded transactions every single day. If this is the case, you should always keep receipts and write down all purchases for later financial consolidation. After tracking transactions, record them in your books and cross-check the records against all bills and invoices.

  3. Reconcile accounts

    Account reconciliation must also happen during the financial closing. Match all records to account statements from outside entries, like the bank. Reconcile your bank statement to ensure all monthly input is accurate. Typically, you can break your accounts down into three categories:

    Prepaid or accrued accounts
    Bank loans and notes
    Cash, checking, and savings accounts

    Start with one of the above and then work your way through the others. Divvying up the records during reconciliation can help stay organized and catch mistakes quicker.

  4. Review all petty cash

    If your business uses petty cash or has a petty cash fund, you must account for that money at month-end too. Record all receipts for items purchased using petty cash and make sure the records match the balance of your petty cash fund. If something is off, chances are you are missing a receipt or forgot to record petty cash that was used.

  5. Look over fixed assets

    Fixed assets are long-term items that add value to your business and are comprised of things like:


    These typically do not convert directly into cash. Since fixed assets tend to be larger purchases, they can depreciate in value over time. When closing any books for month-end, always record any payments you have made related to fixed assets. This includes things like maintenance, parts, and replacements. 

  6. Count stock and inventory

    If you want your stock and inventory numbers to be accurate, you must perform monthly inventory counts. Counting your stock every few weeks allows a business to decide what items need to be replenished and how frequently. Some types of inventory may need to be monitored more than others. 

    If you do not accurately track inventory, a business could experience problems like shrinkage. Use inventory count to make adjustments and reconcile the books when you complete month-end procedures.

  7. Organize and review financial statements

    At the end of the month, you have the responsibility of organizing all business units and reviewing the financial statements. The period-end documents mainly include:

    The general ledger
    Business balance sheet
    Profit and loss statement

    Each month, these statements should be consistently organized. That way, you’re not scrambling the last week, looking for documents.

  8. Check expense and revenue accounts

    At month-end, it’s always best to check on the performance management of your revenue and expense accounts. Look to see all expenses have been recorded in the correct accounts for the proper time period. Make sure all accruals, debits, and prepaid expenses are also accurately documented in the books.

  9. Review data before closing

    Before you completely close all accounts at the month-end, consider having a second set of eyes review the work. This is the last chance to perfect your audit trails in real-time before the books are shut. The person reviewing your accounting information should be a supervisor or manager who has experience handling the accounts.

  10. Prepare for the next month

    To keep on top of all monthly accounting responsibilities and cut down on the time spent closing, it’s a good practice to create a financial calendar. This can help an accounting team prepare the books for next month’s close and avoid falling behind.

    On the calendar, plan on which days you will collect reports, record transactions, and close the books. Establish a date by which all expenses and income must be posted. Communicate this with anyone that has access to adjusting the ledger. As time goes on, you can tweak the calendar when you find processes that work better.

The Future of the Financial Close

As in any industry, the next step in optimizing the month-end close is to adopt financial technology that optimizes the process.

There is a case study for every form of automation software on the market, so it can be hard to choose the right platform. However, the future of the financial close is to automate processes, so start your research now.

This is an affordable choice whether you are installing ERP systems or simple software for a mom and pop shop. Ditch the paper ledger and Excel programs. The most successful month-end management lies in technology.

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