Helpful Information















Financial Close

The "closing of the books" is a process often misunderstood by those not involved in financial accounting and reporting. Sometimes owners and company executives who rely on financial information underestimate the amount of work necessary to finalize accurate financial information. Other times, they assume that the process is more difficult than it is. The reality is that many transactions take place every day in a typical business and these transactions must be reviewed and finalized at the end of each accounting period, whether it is monthly, quarterly, or yearly. Most companies produce monthly, quarterly and yearly financial information. Public companies are required to file financial information with the U.S. Securities and Exchange Commission. Private companies are required to file taxes that should be based on financial statements. Also, if a loan is needed for the business, financial statements reviewed or audited by an accounting firm will be required.

Most companies have a financial close process with journal entry review and approvals required by different levels within the financial organization. A checklist indicating responsibility and due dates should be utilized. Basically, the "close" process consists of the following:

Income Statement Sales and Expenses

  • Review sales, product/service cost, and profitability reports by customer and item within the close period. Research profitability that appears too high or too low. Ensure that transactions are booked in the appropriate accounting period. For instance, a shipment sent on Dec 31 with a cost booked on December 31, should not be invoiced on Jan 1.
  • Review other sales and cost of goods sold expenses directly relating to sales such as freight, warehouse, manufacturing labor and expense, discounts, and rebates.
  • Record payroll, benefits and payroll taxes by journal entry if utilizing a 3rd party payroll company.
  • Review all other expenses. Research those that are higher or lower than historical trends. Ensure that bills have been received and entered or accrued (recording of expenses incurred but not yet entered or paid) in the appropriate accounting period. The idea is to match expenses with appropriate sales.

Balance Sheet Accounts

  • Perform bank reconciliations for bank accounts comparing cash deposits and distributions recorded in the company accounting system to bank statements.
  • Reconcile Accounts Receivable on the balance sheet to the Accounts Receivable Aging Report listing receivables due by customer.
  • Reconcile Inventory balance to the inventory reports listing quantities and valuation by item.
  • Review other asset accounts such as prepaid expenses and fixed asset purchases to ensure all transactions have been recorded correctly. A prepaid expense may be an annual insurance premium paid in December for the following year. This payment should not be recorded as an expense against December sales but rather an expense against total yearly sales in the following year.
  • Reconcile Accounts Payable to the accounts payable aging report by vendor.
  • Review other liability accounts such as accrued expenses to ensure that all liabilities have been recorded. An example of an accrued expense is commission on sales this month that are not due until payments are received one to two months from now. This commission expense must be recorded or accrued at the time of the sale and not when paid.