An Accountant’s Guide to the Month-End Close Process

Do you want to learn more about debit, credit entries, and how to record your journal entries properly? Then, head over to our guide on journalizing transactions, with definitions and examples for business. After most of the cycle is completed and financial statements are generated, there’s one last step in the process known as closing your books. The trial balance is like a snapshot of your business’s financial health at a specific moment. In this case, we can see the snapshot of the opening trial balance below. Any account listed on the balance sheet is a permanent account, barring paid dividends.

We do not need to show accounts with zero balances on the trial balances. The retained earnings account balance has now increased to 8,000, and forms part of the trial balance after the closing journal entries have been made. cost accounting standards for government contracts This trial balance gives the opening balances for the next accounting period, and contains only balance sheet accounts including the new balance on the retained earnings account as shown below. Closing journal entries are used at the end of the accounting cycle to close the temporary accounts for the accounting period, and transfer the balances to the retained earnings account. So for posting the closing entries in the general ledger, the balances from revenue and expense account will be moved to the income summary account. Income summary account is also a temporary account that is just used at the end of the accounting period to pass the closing entries journal.

• Automation can handle repetitive tasks like data collection, account reconciliations, and report generation, freeing up the accounting team to focus on more strategic activities.
• Following these structured steps ensures your closing process in accounting is consistent, accurate, and delivers reliable financial information for business decision-making.
• It is a crucial process for business from the viewpoint of strategic and financial decision-making, and therefore, should be approached with utter seriousness.
• Let’s move on to learn about how to record closing those temporary accounts.
• In short, we can clear all temporary accounts to retained earnings with a single closing entry.
• These intelligent systems can identify patterns, flag exceptions, and even learn from historical data to continuously improve.
• For example, the revenues account records the amount of revenues earned during an accounting period—not during the life of the company.

This process creates a clear cutoff point, ensuring that all revenue, expenses, assets, and liabilities are accurately recorded for the period, resulting in accurate financial data. This process typically includes reconciling bank statements, verifying account balances, reviewing revenue and expenses, and preparing financial statements. A well-structured month-end close helps businesses track performance, make informed decisions, and comply with tax and regulatory requirements. During a month-end close process, a company reviews all their transactions, reconciles all accounts, and handles any errors or anomalies in the recorded financial transactions. This is done to ultimately create accurate financial statements at the end of the month and review the company’s financial performance. After posting closing entries in the general ledger and/or sub-ledgers, the next step is to perform reconciliations for all the accounts in order to ensure their accuracy.

It’s designed to help accounting and bookkeeping teams organize their month-end close process efficiently. It’s arranged by Balance Sheet Account Order, meaning tasks are listed in the order that accounts typically appear on the balance sheet—from assets to liabilities and equity. As each line of the closing entry is posted to the individual accounts, in the item section of the ledger, a notation is added. When the closing entries are posted, and the balances are update, the ledger will show zero balances for all revenue, expenses, and drawing accounts. Total revenue of a firm at the end of an accounting period is transferred to the income summary account to ensure that the revenue account begins with zero balance in the following accounting period.

Regularly Reconcile Accounts

With automation, you’ll be able to cut down on errors managing sales tax in your data and complete calculations and reconciliations in seconds. Further, you can eliminate unnecessary process delays caused by waiting for staff to begin the next step in the chain. Before you begin your closing efforts, you’ll need to assemble all of the relevant documents and data you’ll need to create the corresponding financial reports.

Step #4: Close Dividends

• Traditionally, the month-end close process has been a time-consuming and stressful process for finance professionals.
• With the use of modern accounting software, this process often takes place automatically.
• Eliminate manual bottlenecks and accelerate your close process with ease.
• Having updated and ensured the accuracy of your general ledger and other records, you’ll generate the relevant documents (see above list) to produce your month-end report.
• Suppose a business had the following trial balance before any closing journal entries at the end of an accounting period.
• There are also steps, like using a month-end close checklist and leveraging automated accounting solutions, that companies can take to accelerate the month-end close process.

To close expenses, we simply credit the expense accounts and debit Income Summary. Temporary accounts include all revenue and expense accounts, and also withdrawal accounts of owner/s in the case of sole proprietorships and partnerships (dividends for corporations). Reconciling accounts is one of the most important parts of the month-end close.

Cash Management

On the balance sheet, $75 of cash held today is still valued at $75 next year, even if it is not spent. Remember that all revenue, sales, income, and gain accounts are closed in this entry. To close that, we debit Service Revenue for the full amount and credit Income Summary for the same.

In essence, we are updating the capital balance and resetting all temporary account balances. Even with a detailed checklist and documented process, your team needs proper training to execute the month-end close accurately and efficiently. Regular training sessions help ensure that everyone understands their responsibilities, how to use accounting software, and the best practices for completing each task.

Step 1: Close all income accounts to Income Summary

A simple mistake or overlooked file early in the process will complicate your reconciliation efforts and can potentially cause even greater headaches for subsequent audits or year-end closings. Before these records are finalized and shared, you’ll want to perform a last review for accuracy. Upon their authorization, the financials from the month can be officially closed, allowing no further amendments or changes.

For example, an invoicing error might force you to amend that file with credit notes or create a whole new, this time accurate, payment request. Because most accounting is done now using accounting software, Closing Entries happen behind the scenes. If an Income Statement or Balance Sheet is needed for a particular month, the report is generated by specifying the dates of the information required. Closing Entries are not needed with accounting software because the work of the Closing Entries is done behind the scenes. Closing entries help in the reconciliation of accounts which facilitates in controlling the overall financials of a firm. This is where mistakes tend to creep in—whether it’s a missed entry or a miscalculated balance, small errors can lead to significant reporting issues.

and Reporting

For example, imagine not properly closing revenue accounts at year’s end. Let’s talk about why closing entries are so critical for you as a bookkeeper or accountant. Closing entries might sound technical, but think of them as a necessary reset for your accounting books at the end of each period—be it monthly, quarterly, or annually. If you’re reading this, you likely want to understand closing entries in accounting—and I’m here to help.

Step 3: Close Income Summary account

The month-end close process is a complex, detail-heavy task where even small oversights can lead to significant issues. When performed frequently, it’s easy for steps to blur together or be skipped, leading to errors requiring hours of correction or a complete restart. With  reconciliation completion and rectification of all  discrepancies, the next step is to compile monthly financial data  and create financial reports. Let’s dive straight into how businesses can efficiently close their books at the end of the month.

Steps in Closing Process

Closing all temporary accounts to the retained earnings account is faster than using the income summary account method because it saves a step. There is no need to close temporary accounts to another temporary account (income summary account) in order to then close that again. Modern technology solutions have transformed month end close processes in accounting from a manual, time-consuming exercise into a streamlined, efficient workflow. By leveraging the right tools, finance teams can dramatically reduce close times while improving accuracy and control. This includes bank accounts, credit cards, loans, and intercompany accounts.

Calculate and post depreciation entries based on your company’s depreciation policy. For businesses with inventory, conduct physical counts or cycle counts to verify inventory levels and make adjustments for obsolescence or damage. This step ensures your balance sheet accurately reflects the value of your company’s physical assets. The month-end close is a critical accounting procedure that finalises all financial activity for the previous month. This systematic process ensures your organisation captures accurate financial data to support informed business decisions.

By doing this, you can easily see how much profit was retained in the company and how much went out to shareholders, making financial reports much clearer. Let’s say you’re closing books for a manufacturing company, and dividends of $10,000 were declared and paid. Here are some real-world examples so you can see change in accounting estimate examples how closing entries work.

Temporary accounts are closed or zero-ed out so that their balances don’t get mixed up with those of the next year. Once we have made the adjusting entries for the entire accounting year, we have obtained the adjusted trial balance, which reflects an accurate and fair view of the bakery’s financial position. Temporary accounts are used to record accounting activity during a specific period.

Financial Cents provides customizable workflow templates that allow you to document and standardize your month-end close procedures. These templates serve as detailed guides, outlining each step required to complete the process. By implementing these templates, you ensure that every team member follows the same procedures, maintaining uniform quality of work regardless of who manages the task.