Arguably, monthly financial statements are the most important strategic tool for an organization. Accurate and timely statements provide key data to support fiscal monitoring and decision making, prevent costly mistakes, and prepare an organization for tax time.
But financial statements are only valuable when they are prepared accurately using a sound basis of accounting such as Generally Accepted Accounting Principles (GAAP) and are produced within a reasonable period of time after the month has ended.
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This result requires controlled and coordinated activities throughout the month in addition to processes and procedures that are well thought out, documented, and incorporate internal controls such as segregation of duties across all appropriate departments. Successful monthly (or other periodic) reports are critical to developing financial statements and other data such as Key Performance Indicators to support management’s reporting needs.
If this sounds overwhelming, fear not. Let’s break down the major tasks into a series of eight steps.
1. Record daily operational financial transactions
Since the goal is to create timely and accurate financial statements, any procedures that can be integrated into the daily operations will simplify the monthly closing process. Ideally, activity should be recorded when it happens, rather than waiting until the end of the month.
Also, departments whose activities impact financial records should be enlisted to complete activities on an ongoing basis. They should ensure the accounting department receives complete and accurate source documents to record information into the accounting system.
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2. Reconcile accounting system modules and subsidiary ledgers
Accounting systems often have integrated modules such as payables, sales or investments to manage a specific function of the company. Part of the closing process is to reconcile the subsidiary ledger with the general ledger.
Some organizations may have stand-alone software that needs to be reconciled with the general ledger. For example, a nonprofit may have revenue streams coming from programs, retail, and philanthropy. The accounting system will be able to integrate programs and philanthropy, but retail may have a stand-alone system for point of sale and inventory control. So, it’s important to build a daily process that works between retail and accounting to capture, reconcile, and record summary journal entries from the retail system to the general ledger.
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3. Record monthly journal entries
Presenting a complete and accurate representation of the organization typically requires monthly journal entries for accrued expenses, amortization, depreciation, and other activity. In most cases, accounting systems are able to automate recurring journal entries.
4. Reconcile balance sheet accounts
Reconcile cash accounts first. It is one of the easiest ways to locate missing or incorrect entries since cash is part of most transactions. Organizations with numerous monthly transactions will also benefit from reconciling cash on a daily or weekly basis.
Once cash accounts are reconciled and other necessary adjustments made, it’s time to reconcile the remaining balance sheet accounts.
5. Review revenue and expense accounts
Review revenue and expense accounts to confirm accuracy. Revenue is often linked to a subsidiary ledger and therefore has been reconciled. Check expenses to see if they have been recorded in the correct accounts and in the correct time period, and that accruals and prepaids are accurately reflected.
6. Prepare financial statements
Once the accounting team is satisfied that the general ledger is accurate, prepare the financial statements. Many organizations can generate these statements through their accounting systems, while others will need to run reports and compile data, which is often transferred to an Excel document. Another useful review is to compare actuals to budget using the income statement.
7. Management review
The final stage occurs when all documentation required to produce the financial statements, along with the statements themselves, are given to senior management for review. This is a critical internal control, as the person reviewing the statements and supporting documentation typically is not part of the preparation process.
8. Close accounting systems for the month
Once management is satisfied with the financial statements, the accounting period is physically closed in the system, preventing future transactions from inadvertently being recorded in a period that has been reported on. Think of the monthly closing as a “mini-audit” that closes the books for the current month.
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Whether automated software or Excel is used, a proper and timely monthly statement gives management insight into the financial health of the organization and allows company leaders to make informed and timely decisions.
For more information on the monthly close process in the Northeast, contact Jay Burstein at jay.burstein@claconnect.com or 781-402-6378.
For more information, visit CLAconnect.com.