Mastering the Month-End Close Process in 7 Steps

Accounting teams should understand the monthly close process, develop a checklist of tasks to ensure it goes smoothly and correctly, follow best practices, and use available software tools. This guide is intended to help you jump-start this journey. 

What is the Month End Close Process

The month end close process is a complete review of financial activity and performance for an entire month and the preparation of monthly financial statements. It supports your ability to conduct quarterly and year-end financial closes accurately and efficiently. 

Here’s a quick summary of the month end close process steps:

• Enter all customer and vendor invoices into your accounting system
• Reconcile all bank accounts and inventory assets in your accounting system
• Produce financial statements
• Carefully review all statements
• Close the period in your financial system
• Distribute the financial statement
• Prep for the next closing

Understanding the Month End Close Process

The month-end close process has clear steps to follow. You organize, reconcile and report the financial activities of your company for that month. With this process, you won’t have to look back for discrepancies. You will have corrected them each month.   

The general ledger, or GL, is the tool that records your company’s financial accounts. These accounts typically include:

• Assets
• Liabilities
• Equity
• Revenues
• Expenses

While simple in concept, the month end close process involves time-consuming work. At the end of each month, accountants and finance teams come together to address key financial functions:

• Reviewing bank accounts and statements
• Preparing key financial statements, including

* Profit and loss statement, summarizing revenues, earnings, and expenses

* Balance sheet detailing all assets, liabilities, and stockholders’ equity

* Cash flow statement showing  cash balance and cash inflows and outflows

This can be a monotonous task to undertake every month but ignoring it can lead to problems later on. Companies that don’t close their books each month often scramble toward end of the year to find information they need for reporting. Oversights can occur, mistakes can be made, and annual reports can be delayed or flawed.

The best-run organizations gather the information they need as part of their month-end close process. This includes:

• Total income/revenue
• Accounts payable and receivable
• Expense receipts and supplier invoices
• Bank accounts and statements
• Petty cash totals
• Value of inventory

Depending on your business or industry, additional documentation could be required.

The Steps of the Month End Close Process

The financial close doesn’t have to be a headache for the accounting team. Following the right set of steps when dealing with financial records at the end of each month will result in a positive impact on the organization as a whole.

1. Collect Information

Closing the books is a data-intensive task. Start by collecting various data points regarding the accounting period in question:

• Inventory count
• Income statement and balance sheet accounts
• Accrued expenses
• General ledger

Always have a record of daily operational transactions, ideally the moment they’re made rather than waiting until the end of the month. Businesses generally conduct a full physical inventory once a year with a reconciliation to the general ledger, but they also perform sample inventory counts during the year. 

2. Combine the Parts of Accounting

Accounting systems aren’t homogenous entities; they usually come in modules covering specific purposes such as an accounts payable and an accounts receivable department. Part of the closing process is reconciling all these components together.

Ensure that the accounts payable balance, for instance, falls in line with the general ledger. To that end, organize the receipts and all your purchases with your accounting system. Cross-check your records during this step to make sure everything has been recorded and paid when due or prompt enough to take an early payment discount.

For accounts receivable entries, look at all the sources of revenue from loans to invoice payments. Has a customer not finished a payment yet, or have you forgotten to send an invoice? Get those entries sorted out before the end of the month.

3. Reconcile Accounts

Reconciling all your accounts is a main step of the closing. Cross-check your account statements with your receipts, bank forms, and other outside entries. Accounts that need this treatment are:

• Cash, checking, and savings
• Prepaid accounts
• Other balance sheet accounts
• Petty cash

Reconcile your cash accounts first, which are easier to process since discrepancies and mistakes are apparent when you’re dealing with cash. This step also makes you aware of how much cash you have on hand as a business.

From there, move on to reconciling balance sheet accounts. Don’t forget to review the revenue and expense accounts as well to make sure all entries have been accurately reflected.

4. Consider Inventory and Fixed Assets

Not everything of value in the organization can be set to a cash amount. Fixed assets—which can include equipment, property, and vehicles—add long-term value to your business. Keep in mind that they may depreciate in value over time.

In a similar vein, perform an inventory count every month as part of the close. Are you in need of replenishing stock? If so, how much? Are any items perishable or need replacement? Should you make a write-down for obsolete inventory or adjust inventory items to lower of cost or net realizable value?

5. Prepare Financial Statements

Once the general ledger has been updated, the next step is to prepare the financial statements, which can be done either with compiled data in a spreadsheet or automation tools. Topics covered in these documents are typically a summary of the general ledger, profit and loss statements, and balance sheets.

The mere act of going over your financial statements can give you intel into what you’re buying and whether you’re getting a proper return on your investment. They are also an indicator of overspending and other budgetary issues.

Organizing the statements is just as important so that you aren’t scrambling to find them in the last few days of the month. Most forms of accounting software have features built-in for this purpose.

6. Final Review

All related documentation is sent to the accounting manager, Controller, or finance management for review. The person reviewing the closing documents is not directly tied with the closing process up until this point and has a chance to look at everything with fresh eyes.

The month end closing ends when the previous month has been set in stone and no new transactions are recorded on it.

7. Prepare For the Next Closing

What have you learned over the course of this process, and what can you apply to make next month easier? When you get a fresh start next month, dedicate yourself to building a financial calendar to keep up with the books. Write down deadlines for:

• Collecting all the transactions
• The receipt and recording of new reports
• Posting all income and expenses
• A general timeline for adjusting the ledger

Communicate your plans to other team members involved in the month end closing process to get everyone on board. You can tweak the calendar as time goes on to fit it around your schedule.

Tasks to Streamline Month-End Close

Here’s a list of tasks to help streamline your month-end close:

• Enter all vendor invoices for the month into your accounting system and reconcile vendor statements with the corresponding accounts payable balances.
• Enter all customer invoices for the month into your accounting system and link to customer payments.
  • These accounts payable or accounts receivable aging reports will show you who pays on time, who pays late, and who hasn’t paid at all. Use the information for payments cash flow planning and speeding up customer invoice collections.
• Reconcile all bank accounts: checking-savings, credit cards, accounts for prepaid, accrued or deferred expenses, and petty cash
• Reconcile inventory assets with your accounting system
• Produce financial statements that include:
  • Profit-loss statement
  • Balance sheet
  • Cash flow statement
  • Other reports specific to your business or industry

Once completed, carefully review these statements and make changes based on additional data, calculation errors, or budget variances. If you operate off a financial plan, compare the results with your forecast. This will help you adjust the plan if you aren’t on track. You can also use ChatGPT in accounting to analyze financial statements with no identifying information for potential cost savings opportunities and unusual data trends.  

Finally, you must officially close the period in your financial system and distribute the financial statements. 

The Month End Close Checklist

The financial accounting role goes beyond just transactions, covering income cash, bank loans, savings accounts, monthly expenses, and other essential parts that impact the entire organization. How do you make sure you haven’t missed anything? A misplaced invoice or statement can result in curious losses that you won’t be able to account for.

When conducting a monthly closing process follow the steps in the month end close checklist:

• Cash: Adjust for any outstanding checks or deposits until your ending cash balance matches what the bank statement says. Deposit any undeposited funds from the prior month.
• Prepaid expenses and intangible assets: Adjust balances for the passage of time for prepaid expenses like insurance premiums and prepaid subscriptions and intangibles like patents being amortized.
• Inventory and fixed assets: Properly document depreciating value and outdated/expired inventory.
• Accounts payable and receivable: Look for unapplied credits or past-due balances to write off. Record invoices as payables through a cut-off date shortly after month end. 
• Notes payable with the bank: Consider amortization schedules and properly document the cost of monthly interest.
• Intercompany accounts: Payables and receivables should match between both businesses. Check for prepaid expenses too. Eliminate intercompany transactions in consolidation. 
• Accrued vacation and payroll: For employee reimbursement.
• Accrued taxes: Including those that apply to property, sales, and payroll.
• Expenses: Including supplies and maintenance costs.
• Reconcile balance sheet accounts: Reconcile cash balances to bank account statements and reconcile subsidiary ledgers to the general ledger. 

This checklist does not have to be completed in order. In fact, some tasks might be delegated to another department. Identifying task dependencies will inevitably be an additional step for larger organizations.

Best Practices

On top of a laid out plan and a checklist, let’s go over some best practices to make this essential business process as smooth as it can be.

• Don’t sacrifice accuracy for speed: Closing the books can be time-consuming, but the data you’re working with will reflect in your future business decisions.  Manage your expectations accordingly by not rushing the work and accidentally leaving out important statements or entries. A good rule of thumb is to plan on finishing the monthly close process in 5 to 10 days after the accounting month-end date, with 6.4 days as the median in an APQC Benchmarking Survey. But you can accelerate the close by about 25% with automation software that reduces errors and fraud risk and generates real-time automated mass payment reconciliations. Then spend more accounting team time on valuable analysis for cost reductions and more strategic work. 
• Remember to manage your time well: Efficiency matters in the accounting department. If you have a closing date, dedicate yourself to meeting it to the best of your ability. Discuss with team members about realistic timelines and communicate properly to avoid the chance of delays.
• Slowly learn from mistakes: You close at the end of every month, so there’s always another chance to improve upon setbacks seen in the previous month. New accountants will need some time to get acquainted with the related tools and software and should take advantage of any available training programs.
• Make relationships with other teams, even those not in finance: If more people are aware of what you are doing, other departments can help contribute needed financial data and understand where the effort is going. Senior management especially should have an idea of your objectives.
• Take advantage of automation: Technology has streamlined accounting tasks greatly. Software tools can be used to collect data and run calculations quickly without the risk of human error, among other optimizations.

Automation in the accounting space and the month end closing process has become essential as a best practice. But whether you’re a seasoned professional or a new accountant taking on the task of closing the books, having these practices in mind will help you hit the ground running.

Challenges of the Month End Close Process

Like any business process, if your month-end close is built on a shaky foundation, there will be problems. Incorrect recording of data, expenses not captured, or captured expenses coded incorrectly are potential problems from a poorly designed process. Without the ability to capture accurate financial data, you won’t deliver reliable reports in a timely manner.

Too much detail in your financial reporting can also lead to delays in the month-end close. That may include a bloated chart of accounts where much time is spent tracking information, but where reporting against it provides little business value.

For business owners with no expertise in this area, you might consider partnering with an experienced accountant, bookkeeper, or accounting firm for the chart of account set-up. This simple step could help you achieve an optimal balance between financial data collection and reporting detail.

Benefits of the Month End Close Process

At the end of each month, companies often make sure their books are closed so that the records are set in stone. This task, known as the month end close process, results in:

• A reliable and accurate accounting system
• More informed business decisions
• Stronger visibility into the financial health of your company
• Easier financial auditing
• Simplified tax filing

Closing the books each month can be a tedious process, but it is vital to ensuring the financial health of your company. The month end close can help you identify deviations from your financial plan early, so you can respond quickly. Conversely, it can uncover new opportunities for business growth, and drive strategies so you can exploit them.

What it comes down to is being able to proactively monitor business performance for competitive advantage. Master the month-end close process, and you’ll do just that. Mastery of the month end close improves with understanding our eBook, “The Ultimate Accounts Payable Survival Guide.”