The Month-End Close Process, Step by Step

What is the month-end close process?

The month-end close is the set of steps that turns a month of recorded transactions into numbers you can stand behind: you stop the month at a clear cut-off, record what is missing, such as accruals, prepaids and depreciation, reconcile every balance sheet account to the records behind it, review the journal entries and the numbers, then lock the period and report. If you are the accountant or finance manager who closes the books, the close is where your month is judged, and the goal is simple to state: a clean, defensible record you can hand to the owner, the board or an auditor, with what was checked and how. This guide takes each step in order, gives you a checklist to work from, and follows one invented company’s close day by day.

Why close the books every month?

Because accrual accounting puts each transaction in the month it happened, and only a close makes that true for the month just ended. The FASB’s Concepts Statement 8, Chapter 4 describes accrual accounting as recording the effects of transactions in the periods in which they occur, rather than only in the periods in which cash is received or paid. During the month your accounting system records what arrives: bills, invoices, payments and payroll. It does not know about the cleaning service you received but have not been billed for, or the share of a year’s insurance that you used up in the month. The close adds those, so the month’s profit reflects the month’s activity, not the timing of the mail.

A monthly close also keeps problems small. A bank item that does not match is easy to explain three days after month end and hard to explain eleven months later, when the person who made it has forgotten or left. Errors found in the close are fixed in the same month they were made, so they never reach a board pack, a lender’s covenant test or the year-end audit.

How long should the month-end close take?

There is no rule for a private company, so set your own target, a number of working days after month end, and measure every close against it. A small team that closes in about two weeks can usually bring that down by moving work into the month, such as reconciling the bank weekly and recording recurring accruals from a template, rather than by working faster in the first days of the next month. Public companies work to a fixed deadline: the SEC’s Form 10-Q instructions give large accelerated and accelerated filers 40 days after the end of a quarter to file, and all other registrants 45 days, and the books must close well before that so the filing can be prepared and reviewed.

Pick a target you can keep, because a close that finishes on day five one month and day fifteen the next tells the people who rely on your numbers that they cannot plan around them. Publish it in a close calendar, and shorten it once you meet it every month.

What are the steps of the month-end close?

The close follows six steps in order, and each one depends on the one before it. You cannot reconcile a balance that is still missing entries, and you cannot review the numbers until the balances behind them are reconciled.

How do you set the cut-off for the month?

You decide that every transaction dated in the month belongs to it, and you make sure each one is recorded in the month and nothing from the following month is. Cut-off matters most for the transactions that straddle month end: goods received on the 30th whose bill arrives on the 4th, services delivered in the month but invoiced in the next, and payroll for days worked at the end of the month but paid in the following one.

Start with three questions. Has every supplier bill dated in the month, or for goods and services received in the month, been entered? Has every customer invoice for work delivered in the month been raised, and has nothing delivered in the next month been invoiced early? Have you recorded every payment and receipt that cleared the bank in the month? The receiving records, delivery notes and timesheets are what settle each question, because they show when the goods or services actually changed hands. Revenue cut-off has its own detail, which the auditor’s questions on deferred revenue cover, and the gap between what you invoiced and what you earned is explained in why ARR is not revenue.

Which accruals and deferrals do you record?

You record an accrual for every cost you incurred in the month that no bill yet covers, and you release the part of every prepayment that the month used up. The common accruals are a monthly service received but not yet billed, wages earned at the end of the month but paid in the next, interest owed on a loan, and the utility bill that arrives weeks late. The common deferrals are a year of insurance, software or maintenance paid up front, which you hold on the balance sheet as a prepaid and spread over the months it covers.

Two habits stop accruals from causing more trouble than they solve. First, set each accrual to reverse on the first day of the next month, so when the real bill arrives and is entered, the expense is not counted twice. Second, keep a schedule of every prepaid with its start date, end date and monthly release, so the release is a calculation, not a judgment made fresh each month. Why the P&L moves after the bill shows what happens to the margin when either is missed.

Depreciation and payroll belong in this step as well. Depreciation is the share of each asset’s cost written off in the month, worked out from your fixed asset register and your policy for each class of asset. Payroll needs its taxes and benefits recorded as liabilities until they are paid. Under the monthly deposit schedule in the IRS’s Publication 15, employment taxes on payments made during a month are due by the 15th day of the following month, so a monthly depositor’s payroll tax liability at month end should match the deposit due for that month.

Which accounts do you reconcile, and how?

You reconcile every balance sheet account, each one to an independent record of what the balance should be. The GAO’s standards for internal control in the federal government, the Green Book, describe reconciliations as comparing transactions from two sets of records to find which are recorded properly, which have yet to be recorded and which were recorded wrongly and need correcting, and name a bank reconciliation as the example of checking your records against outside data. That is the whole idea: one balance, two sources, and every difference explained.

The independent record depends on the account:

• Cash: the bank statement, with payments not yet cleared and deposits not yet credited listed as reconciling items.
• Accounts receivable and accounts payable: the aged lists of customer and supplier balances, the sub-ledgers, whose totals should equal the control accounts in the ledger.
• Prepaids and accruals: the schedules you keep for them, item by item.
• Fixed assets: the asset register, for cost and for depreciation to date.
• Payroll liabilities: the payroll reports and the deposits made after month end.
• Loans: the lender’s statement of the balance and interest.
• Suspense or uncategorized accounts: nothing, because the target balance is zero.

A finished reconciliation records five things: the balance in the ledger, the balance in the independent record, each reconciling item with its age, who prepared it and who reviewed it. A reconciling item is not a resolution. A payment that has not cleared after a few days is normal; one that has sat uncleared for three months is a question to answer, because it may be a lost check, a duplicate or an entry that was never real. Age every item, and set a limit after which an item has to be explained rather than carried.

How do you review journal entries at month end?

You pull every manual journal entry posted in the month, check that each one has support and the approval your rules require, and look hardest at the ones posted in the last days of the month or after it ended. Period end is where an auditor looks too. The PCAOB’s fraud standard, AS 2401, notes that fraudulent journal entries are often made at the end of a reporting period, so the auditor’s testing ordinarily focuses on the entries and adjustments made then.

Three questions cover most of the review. Does every hand-posted entry above your threshold have a reviewer who did not prepare it? Was any entry posted after the period closed but dated inside it? Does every entry have an explanation and a document behind it that a stranger could follow? The few that fail are worth a second look, because a person who wants to move the numbers rarely needs to touch cash: an entry is enough. Journal entry testing sets out the traits that make an entry high risk and how to screen for them each month.

What is a flux analysis?

A flux analysis compares each line of the month’s income statement and balance sheet with the prior month, the same month last year or the budget, and asks for an explanation of every move above a threshold you set. It is the last check before the numbers leave your hands, and it catches what the reconciliations cannot: an expense coded to the wrong account, an accrual recorded twice, or revenue that fell because an invoice was never raised.

Set the threshold in dollars, and for larger accounts as a share of the balance as well, so the review stays short. Write each explanation as a cause, not a description. “Cleaning expense rose because the August accrual did not reverse” is an explanation. “Cleaning expense rose” is just the number again. A move with no cause behind it is a reason to go back to the earlier steps before you report.

Who should prepare the close, and who should review it?

Different people should prepare and review each part of the close, so that no one person records an entry, reconciles the account it hits and approves both. The Green Book calls this segregation of duties: separating the authorizing, recording and reviewing of transactions, and the handling of the assets behind them, so no one individual controls every key part of a transaction. It also recognizes that a small team cannot always split every duty, and expects alternative controls where it cannot.

On a team of two or three, the practical version is a reviewer for each reconciliation and each manual entry above a threshold, even when the reviewer is the owner or an outside accountant. Where one person must prepare and post, the review has to be after the fact and on the record: a list of every entry that person made, read by someone else before the period is locked. Segregation of duties on small teams covers which pairs of duties to split first.

When do you lock the period?

You lock the period once the reconciliations are reviewed, the journal entries are approved and the flux analysis is explained, and not before. Locking, which Xero and QuickBooks Online offer as a lock date or a closing date, stops anyone posting a new entry dated in the closed month. After that, a correction goes into the open month with an explanation of what it fixes, or the period is reopened with an approval that is itself recorded.

A lock is only as good as the habit of not working around it. An entry posted after the lock but dated inside the closed month means the numbers already reported have changed, and the people who read them do not know. Review the list of any such entries as part of the next month’s close, so the record shows each one and why it was made.

What goes on a month-end close checklist?

A month-end close checklist lists every task, the person who owns it, the working day it is due and the evidence that shows it was done. The evidence is what makes the checklist worth keeping: a ticked box says someone believed the work was finished, while an attached reconciliation shows the reviewer, the auditor and you what was actually checked. Use the list below as a starting point and add the accounts your business has.

Cut-off and recording

• All supplier bills for goods and services received in the month entered, from receiving records and the inbox.
• All customer invoices for work delivered in the month raised, and nothing invoiced early.
• Payroll for the month recorded, with wages earned but unpaid at month end accrued.
• Accruals recorded for every service received without a bill, each set to reverse next month.
• Last month’s accruals reversed, and checked against the bills that have since arrived.
• Prepaids released for the month from the prepaid schedule.
• Depreciation recorded from the fixed asset register, and additions and disposals entered.
• Deferred revenue released for what was delivered in the month.

Reconciliations

• Every bank and card account reconciled to the statement, with reconciling items aged.
• Accounts receivable and accounts payable sub-ledgers tied to the ledger’s control accounts.
• Prepaid, accrual and deferred revenue balances tied to their schedules.
• Fixed asset cost and depreciation to date tied to the register.
• Payroll tax and benefit liabilities tied to payroll reports and the deposits that follow.
• Loan balances tied to the lender’s statements, with interest accrued.
• Suspense and uncategorized accounts cleared to zero, or each item listed with its age and owner.

Review and report

• Manual journal entries reviewed for support and approval, with period-end and late entries read in full.
• Flux analysis completed, with a cause written against every move above threshold.
• Reconciliations signed off by a reviewer who did not prepare them.
• Period locked in the accounting system.
• Close package sent: the statements, the reconciliations, the flux explanations and the list of open items.

Worked example: Ferrygate’s September close, day by day

Ferrygate Plumbing & Heating is an invented company, one of the Demo companies Ressura uses to show its checks, and every figure below is made up for the example. It is a residential and light-commercial plumbing and heating contractor in Tacoma with about forty staff, its books are kept in Xero, and its target is to close each month by the eighth working day. Here is its September close, the working days counted from 1 October.

Day 1: cut-off. The accountant gathers every bill for goods and services received in September. Four bills dated in the last week of September arrive on 1 October and are entered into September. Technicians worked 29 and 30 September, but those two days are paid on the next payroll in October, so the accountant accrues $14,600.00 of wages for them.

Day 2: the bank. The operating account’s statement shows $212,480.15 at 30 September. Payments of $6,420.00 have not yet cleared and a deposit of $3,875.00 has not yet been credited, so the books should show $209,935.15. They show $210,120.15. The difference of $185.00 is a card processing fee the bank took on 30 September that nobody recorded. It is entered, and the bank reconciliation ties with two reconciling items, both under a week old.

Day 3: accruals and prepaids. Northline Office Cleaning’s September bill of $5,000.00 has not arrived, so the accountant accrues it. Then the August accrual is checked: it was $5,000.00, set up at the end of August for the same service, and it should have reversed on 1 September. It had not. Northline’s August bill arrived in September and was entered as a September cost, so with the new accrual September would carry $10,000.00 of cleaning, $5,000.00 too high. The reversal is posted and September carries the $5,000.00 it should. On the prepaid side, the $24,000.00 that Puget Fleet Services billed in January for a year of van maintenance releases $2,000.00 for September, leaving $6,000.00 paid ahead for October to December, which ties to the schedule.

Day 4: sub-ledgers and the register. The aged payables list totals $86,240.00, but the payables control account in the ledger shows $87,020.00. The $780.00 difference is a manual journal posted straight to the control account in August, with no supplier attached, so no supplier list could ever include it. The accountant traces it to an accrual for a Cascade Pipe & Supply delivery that was posted to payables instead of to accrued expenses, and then billed by the supplier as well, so the same cost sat in payables twice. The journal is reversed, with a note in the close package that it corrects August, and the two then agree. The fixed asset register is a clean result: September depreciation of $3,450.00 recomputed from the policy matches the ledger, and cost and depreciation to date tie to the balances in the books.

Day 5: journal entries and suspense. Of 46 manual journal entries in September, one is above Ferrygate’s $10,000.00 review threshold: journal 1263, for $12,500.00, which moves the cost of a van’s new shelving from repairs into equipment. The same user prepared and approved it on 30 September. The controller reviews the invoice behind it, agrees the shelving is equipment and records the approval. The suspense account holds $640.00 received on 12 September with no reference; it is matched to a customer’s payment for a boiler service and applied to their invoice, which clears suspense to zero.

Day 6: the flux review. The accountant compares September with August, and every move above $2,500.00 needs a cause. Revenue rose $41,000.00 because the Westgate Senior Living installation reached its second milestone. Wages rose $14,600.00 because the two days worked but unpaid at month end are now accrued, which August’s close did not need. Cleaning expense is flat at $5,000.00, where without the reversal on day 3 it would have doubled. Every move has a cause.

Day 7: lock and report. With every reconciliation reviewed, the period is locked in Xero, and the close package goes to the owner: the statements, the reconciliations with their reviewers, the flux explanations and the list of open items. It reads in one line: September closed on day 7, every balance tied, four items found and corrected, and $5,000.00 of cleaning cost kept from being counted twice before anyone saw the numbers.

Without the close, September’s profit would have been overstated by $14,600.00 of wages and $185.00 of fees, and payables on the balance sheet would have been $780.00 too high. Nobody reading the report would have known.

What procedures keep the close from slipping?

Written month-end close procedures keep the close from slipping, because they make the close the same every month whoever runs it. For each task they say who owns it, which working day it is due, which report or schedule it starts from, what the finished evidence looks like and who reviews it. The checklist above is the list of tasks; the procedures are how each one is done, written well enough that a new hire, or you after a holiday, could follow them without asking.

Three practices shorten a close more than any amount of effort in the first week. Move work into the month: reconcile the bank weekly, enter bills as they arrive and keep the prepaid schedule current, so month end only finishes what is already nearly done. Make recurring entries into templates, such as the monthly prepaid releases, standing accruals and depreciation, so they are posted the same way each month and reviewed in a minute. And keep a list of open items from one close to the next, so a question left over from last month is answered, not rediscovered. Continuous controls explains why testing transactions as they happen beats finding the same problems once a year.

What should you hand over after the close?

Hand over a close package that shows what was checked, not only the result. The owner or board wants the statements and a short account of what moved and why. An auditor or lender wants the evidence behind them: each reconciliation with its preparer, reviewer and reconciling items, the journal entry review, the flux explanations and the list of anything still open.

A close that found nothing is a good result, and the package should say so plainly, because “every balance tied to its record and every manual entry above the threshold was reviewed” is a statement your reader can rely on. Name what was checked and anything that could not be, such as a statement that had not arrived. A clean package each month is also the best preparation for the year-end audit, because the auditor’s request list asks for the same reconciliations, and you will already have twelve of them.

How does Ressura help with the month-end close?

Ressura checks several of these steps for you, on every transaction rather than a sample, and lays out each result with what was checked. The General Ledger Module reads every journal entry and checks that a hand-posted entry above the amount you set has a reviewer other than its preparer, flags entries posted after a period closed but dated inside it, or posted in the period’s last two days, checks that every accrual reverses in the next period unless you have said it stands, flags anything left in a suspense or uncategorized account for more than 30 days at period end, and checks that your payables, receivables, cash and asset balances equal the detailed records behind them. The Cash & Bank Module matches every bank transaction in the period to an entry in your books, or lists it as still to be matched with its age, and checks that the bank balance at month end equals the cash in your books plus those items. The Fixed Assets Module works out each asset’s depreciation again from your policy and ties the register to the ledger, and the Procure-to-Pay Module raises a missing accrual when your agreement commits you to a fee for a period that no invoice covers. A ledger export is enough to start, or you can connect QuickBooks Online or Xero, and your bank through Plaid. When every check passes, the result says so and lists what was checked, which is the record you hand to your boss or your auditor.

Sources

1. Concepts Statement 8, Chapter 4
2. Form 10-Q instructions
3. Publication 15
4. Green Book
5. AS 2401