Whether you are a CPA in a firm or a small business owner, your business’s success hugely relies on properly closing the books. Month end close or closing the books refers to finalizing a company’s financials after a specific period like monthly, quarterly, yearly, etc.
Accounting close process or a month end close process must be carefully carried out to make sure that the accuracy of your business’ financials isn’t compromised. Although the closing process has its critics, it’s an essential process of keeping any organization healthy and happy.
Thanks to accounting software, most of the closing or month-end close process is now shifted behind the scenes. But it’s still essential for a business owner to understand what’s going on and how the financials are being managed.
And that’s precisely why we are here. So let’s just get right into the dimension of the accounting close process.
WHAT IS THE ACCOUNTING CLOSE PROCESS AND MONTH END CLOSE?
Before we talk about the closing or month end close process, it would be beneficial to first learn about the accounting cycle.
WHAT IS AN ACCOUNTING CYCLE?
A typical accounting cycle involves earning, spending, tracking transactions, and then creating reports to get a sneak peek about all those transactions. Depending on the size of the company, its cycle is made up of five to nine steps. And each step is created to make sure that every penny is accounted for and that the financial reports are accurate.
The closing process is the final step of the accounting cycle. But it would be more suitable to quote that the closing process begins as soon as the accounting period or cycle ends. Note that the period or cycle can vary from company to company.
It’s time to move onto the actual meaning of the closing process.
WHAT IS AN ACCOUNTING CLOSE PROCESS?
At the end of every period, a business needs a trusted accountant to review its account and ensure that everything has been appropriately recorded and all transactions are reconciled. This process helps the company ensure that the accounting data is accurate, complete, and well organized.
Accounts are closed at the end of the accounting cycle to verify and adjust account balances. Moreover, a report is generated, which reveals the company’s current and genuine financial position.
At the time of the month end close process, an accountant or a CPA will prepare your books to start again for the next accounting cycle. The process of account closing requires gathering financial transactions, fixing errors and mistakes, mapping transactions to correct accounts, and creating financial statements.
WHAT IS MONTH END CLOSE?
The closing process carried out monthly is known as month-end close. Although a handful of companies don’t close every month, there’s a lot of value doing the process monthly.
Month end close refers to a monthly closing process. It involves everything that a typical closing process goes through. But as it’s implemented every month, the steps of the accounting cycle are reduced.
All caught up with the closing and month end close process? Now it’s time to learn a bit about the accounts that are being closed at the end of the accounting cycle.
CLOSING ENTRIES & TYPES OF ACCOUNTS
WHY CLOSING ENTRIES?
Closing entries or books at the end of the accounting periods helps the company to take a sneak peek into the past and focus accordingly on the next period. By hand, closing entries is a complex process, but accounting software has made it simple.
The closing process’s main goal or closing entries is to wrap up temporary accounts and adjust the permanent ones. So before closing the books or closing the accounts, you must understand the types of accounts.
TEMPORARY AND PERMANENT ACCOUNTS
Typically, temporary accounts are found in three forms: revenue, expense, and drawing accounts. Permanent accounts are located on the balance sheet and categorized as liability, asset, and owner’s equity accounts.
Temporary accounts tell you how much you have made in a specific period. Permanent accounts indicate to you how much money you have retained. The accounting close process cleans out temporary accounts and shifts the important information to the permanent accounts.
Note, however, that the temporary accounts don’t show us how the company is doing as a whole. The reason why we have to shift the result of the temporary accounts to permanent accounts after every accounting cycle is to look at the bigger picture of the company.
Closing entries or the closing process is done by bridging the temporary and permanent accounts. And that’s precisely why you needed to know about the types of accounts.
Now we know about quite a few things about the accounting close process, let’s get a quick glance at the items that are needed to perform a month end close.
ITEMS YOU WILL NEED TO PERFORM THE ACCOUNTING CLOSE PROCESS
Every business is unique in nature, and what works for a small business might not work for a mega-corporation. But when it’s about performing the accounting close process, most of the businesses generally need the following items:
- General Ledger
- Balance Sheets
- Income Statements
- Bank Account Information
- Inventory Levels
- Total Fixed Assets
- Total Revenue
- Income and Expense Accounts
- Other Financial Statements
Let’s end the piece by highlighting the importance of month end close process for startups, small businesses, and corporations.
IMPORTANCE OF ACCOUNTING CLOSE PROCESS FOR A STARTUP OR SMALL BUSINESS
As a small business owner or a startup founder, you must close the books on monthly basis as it gives you accurate financial statements. Furthermore, it allows you to get a quick glance at your previous months’ performance and helps you to make important decisions for the next accounting cycle.
The following are some benefits of the accounting close process:
- Accurate and comprehensive financial records allow you to make decisions for the future
- It makes tax-filing as a simple and straightforward process
- The results highlight areas that are in need of improvements and tweaks
- It gives you the power to check on everything that’s going behind the scenes
We admit that the accounting close process is a nuisance, but if done properly it can do wonders for your startup, small business, or corporation from a financial perspective.
If you or your business struggle with closing the books each month, contact the team at Hall Accounting Company today and we will handle it for you.
Don’t hesitate to reach out to the team at Hall Accounting Company for help. Please reach out to Josh Hall at Josh.Hall@HallAcctCo.com or Jeremy Hall at Jeremy.Hall@HallAcctCo.Com for more information. From tax filing strategies to tips on bookkeeping and accounting, we’ve got you covered.
FUTURE IMPORTANT DEADLINES
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IRS Deadline for Quarterly Estimated Payments for 2020 (Form 1040-ES)