Accounting Month-end Close Checklist

What is the most important thing for an accountant starting at a new company to do?  For example, I once joined a startup of about 20 people as the first G&A hire to run the finance and accounting functions.  That meant I was really running both functions myself.  There were no teams to manage.  I also got HR duties along with finance and accounting.  It took me a moment to get oriented.

Although I’d spent many years auditing middle market companies and forecasting financial performance with a Fortune 500 company, knowing how to start at this startup was challenging.  I had a vested interest in making sure payroll was paid, every two weeks.  So understanding our cash flows was the first thing to focus on.  That led to a significant focus on collections from customers.  “Dialing for dollars”, or calling the customers’ accounting departments, were the best way to get paid.

After figuring out a process for collections, the next most important task was to produce financial insights to help with decision making by the business.  That meant “closing the books” timely each month.  At the Fortune 500 company, we’d close the books in under 3 days every month except the end of the year.  I knew it was possible for us, a small company, to likewise close the books in under 3 days.

“Closing the books” is the process of finalizing all financial transactions for a specific accounting period (usually monthly, quarterly, or annually) to prepare accurate financial statements. It’s essentially getting the numbers for each account “right” so they don’t have to change in the future.  The purpose of closing the books is to ensure that all revenues, expenses, assets, and liabilities are accurately recorded and reported, allowing a business to understand its financial performance over that period.  Those numbers also drive key performance indicators for the business.

High Level Themes when Closing the Books:

1. Record All Transactions: Ensure that all revenues, expenses, and other financial activities for the period have been recorded.  This can be harder than it sounds.
2. Reconcile Accounts: Match and verify that accounts, such as bank accounts, receivables, payables, and inventory, align with supporting records (e.g., bank statements) to confirm accuracy.
3. Make Adjusting Entries: Adjust for items like accrued expenses, prepaid expenses, and depreciation to reflect the accurate value of assets and liabilities.
4. Generate Financial Statements: After all adjustments are made, prepare the key financial statements: the income statement, balance sheet, and cash flow statement.  You may also need to produce a bevy of other reporting depending on other needs.
5. Close Temporary Accounts: At year-end, if not more often, temporary accounts (revenues, expenses, and dividends) are closed out to zero. Their balances are transferred to permanent accounts, typically retained earnings, to reset the accounts for the new period.

Documenting the steps of closing the books helps to provide a consistent, repeatable process that can be reviewed and improved upon.  The whole process helps ensure financial records are complete, accurate, and in compliance with accounting standards. It provides stakeholders (management, investors, bankers, auditors, etc.) with a clear picture of the company’s financial health and allows businesses to analyze performance, plan budgets, and make strategic decisions based on up-to-date financial data.

At smaller companies, it may be necessary to adjust the close process for what you can handle.  A smaller team may not include everything in the accounting standards prescribe each month.  Some steps or tasks may only be done, quarterly or annually or not at all.  It’s important to keep note of what you’re not complying with so that you can explain to others, when needed, what varies from GAAP financial statements.  As the team grows and the company grows, you can layer in more compliance more frequently.

The sample checklist provided below is based on best practices commonly used in accounting and finance for month-end close procedures.  These are fairly generic for use across many industries.. These practices are derived from foundational accounting principles and operational guidelines often recommended by professional organizations and financial publications, such as:

Accounting Standards and Frameworks: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) outline fundamental accounting requirements, including accruals, reconciliations, and the accurate recording of revenue and expenses.

Professional Organizations:

American Institute of Certified Public Accountants (AICPA) and Chartered Institute of Management Accountants (CIMA) offer resources and guidelines on monthly and year-end closing processes.

Institute of Management Accountants (IMA) also provides guidelines, especially in their Certified Management Accountant (CMA) study materials, for systematic financial close procedures.

Best Practices Literature:

Many resources from finance publications, such as Journal of Accountancy and CFO Magazine, include industry best practices for month-end and year-end closes. Topics frequently include expense allocations, revenue recognition, accruals, and review processes.

Operational Guides from Accounting Software Providers: Software providers like QuickBooks, NetSuite, and SAP frequently publish checklists and month-end close templates to streamline the closing process for their users.

Educational Resources:

Financial and business education platforms, such as Coursera, LinkedIn Learning, and corporate training providers, often include courses on accounting close procedures and financial reporting best practices.

This checklist incorporates common elements from these sources, tailored for general application across industries.  It should help to ensure accuracy and completeness:

Pre-Close Preparation

1. Reconcile Bank Accounts: Verify all bank accounts are reconciled, and discrepancies are identified.  Transactions can often be reconciled daily with automated syncs or integrations between the accounting system and banks.

2. Petty Cash Reconciliation: Count and reconcile petty cash funds.

3. Accounts Receivable Review: Post all customer invoices, apply payments, and follow up on overdue invoices.  Collections should be a normal part of the work flow.  It’s likely that any difficult receivables may require help from other departments, such as sales or customer success.  It’s often beneficial to get information to those departs prior to month-end so they have time to collect prior to your reporting deadlines.

4. Accounts Payable Review: Record all vendor invoices, approve and post outstanding bills, and ensure payments are made or scheduled.

5. Accruals and Prepayments: Review outstanding expenses and record necessary accruals or adjust prepayments.  This can actually be really hard,especially if procurement isn’t centralized.  

6. Fixed Assets and Depreciation: Post depreciation entries and record asset additions or disposals.  I recommend a fixed asset policy of starting depreciation the month after the asset is put into service.  That allows you to book depreciation for the month long before the month ends.  Effectively, depreciation is moved out of the close process to before the close process.

Revenue and Expense Review

1. Revenue Recognition: Ensure revenue is recognized accurately according to company policies and GAAP.

2. Expense Allocation: Allocate expenses to appropriate departments or cost centers.

3. Payroll Reconciliation: Verify payroll entries and ensure all wages, taxes, and benefits are accurately recorded.

Reconciliations and Adjustments

1. Inventory Reconciliation: Match physical inventory to accounting records, adjust for shrinkage, and post necessary adjustments.

2. Intercompany Reconciliations: Ensure all intercompany transactions are reconciled and balanced across entities.

3. Loan and Lease Reconciliation: Verify outstanding loans and leases, record interest accruals, and update amortization schedules.

4. Prepaid Expenses: Allocate the appropriate portion of prepaid expenses for the month.

5. Deferred Revenue and Expenses: Adjust deferred revenue and deferred expenses as needed.

Financial Review and Adjustments

1. Variance Analysis: Review budget vs. actual results and investigate significant variances.

2. Adjust Journal Entries: Record adjusting journal entries (AJEs) as needed, including accruals, deferrals, and reclassifications.

3. Bad Debt Expense and Allowances: Assess and adjust allowances for doubtful accounts if needed.

4. Tax and Compliance Entries: Record any necessary entries related to sales tax, VAT, or other tax liabilities.

Financial Reporting Preparation

1. Trial Balance Review: Review the trial balance for any unusual balances or errors.  To speed this up, you could set a standard of a certain dollar amount and/or a certain percentage change, such as $5000 on expense accounts and/or 10% variance.  These thresholds will vary based on company specific factors, such as size and risk tolerance.

2. Balance Sheet and P&L Review: Generate and review preliminary financial statements (Balance Sheet, Profit & Loss, Cash Flow).

3. Sub-Ledger Reconciliations: Reconcile all sub-ledgers (AR, AP, Inventory) with the general ledger.

4. Close Subsidiary Ledgers: Finalize and close subsidiary ledgers as part of the month-end process.

Finalization and Documentation

1. Management Review: Send preliminary financials to management for review and feedback.

2. Post Adjusting Entries: Make any final adjustments based on management review.

3. Final Financial Statements: Prepare final versions of Balance Sheet, Income Statement, and Cash Flow Statement.

4. Supporting Documentation: Ensure all supporting documentation is organized and stored for audit trail purposes.

5. Close Accounting Period: Close the month in the accounting system to prevent further entries.

Post-Close Tasks

1. Backup Financial Data: Create backups of all financial data and reports.

2. Review Checklist Completion: Verify each checklist item is complete, and document any outstanding issues.

3. Monthly Close Meeting: Hold a meeting with relevant team members to review the month’s close and discuss improvements.

Reporting and Analysis

1. Prepare Financial KPIs: Calculate and report key financial performance indicators for management.

2. Prepare Management Reports: Customize management reports as needed, such as revenue trends, cash flow forecasts, or expense breakdowns.

This checklist helps ensure all tasks are consistently completed for accurate financial reporting.