What Does Closing of Books Mean in Accounting?
While you are engrossed in managing the finances of your clients you must have come across the terms such as the books, closing of books, or month-end close in the accounting industry. It is nothing but the final step in the accounting cycle. Let’s focus on the term closing of books, which means checking all the financial data, reconciling the accounts by zeroing the income and expenses, and then plugging the net profit or loss in the balance sheet, thus giving insight into financial status of a business. This process usually comes after the month ends, when you reconcile accounts.
The closing of books regularly is very important because it helps avoid needless changes to your accounting data once the financial report is generated for tax professionals. It is important to record the expenses in the correct period and closing of books is one way of ensuring it. To ensure that you will have to streamline the process by following the below-listed points.
1. Providing timely financial data
2. Spotting issues and discrepancies early
3. Having financial data ready to share with investors, lenders, and external stakeholders
4. Providing insight into operations
5. Keeping financial records up-to-date
6. Reducing errors and fraud
7. Streamlining audit or due diligence requests
8. Limiting overwork at the month’s end as staff attempts to close everything at once
The Step-by-Step Process for Closing the Books
To gain the maximum advantage from closing the books in your accounting process you will have to understand the process better even if this task is performed by your accountants. It is important because you will be aware of what to expect. We have made a list of steps to follow for closing the books every month.
Examine Preliminary Financial Statements
During the month you will be receiving multiple financial statements such as receipts, invoices, and bills of sale. Once you receive it is important to thoroughly review its information while closing the books.
Accounts Reconciliation
Once the review of the financial statements is done you can proceed to reconcile your accounts with the information available in your financial statements. This information should match with the money under your client. If there is any mismatch then it is the task of your accounts team to find out why is it so. Such a task is time-consuming hence it is vital to choose automated bookkeeping or choose to bookkeeping outsourcing to an outsourcing service provider, to save time and enhance productivity.
Adjust Journal Entries
Under adjusting journal entries, you will be adding any financial updates that were not noted earlier, for example, the late bill that arrived and other accounts receivable. This adjustment can be done along with sorting out discrepancies. This keeps your original journal entries intact for the sake of your records and consistency.
Prepare Closing Entries
Closing of the books also includes zeroing on expenses and income by using journal entries which are also called closing entries. Under closing entries, it records the transfer from the temporary account balances to permanent accounts. In this step, the company formally adds the balances to the official financial data by logging them into permanent balance sheet records.
Running Financial Reports
Once the debit and credit are the same then start preparing the financial reports such as balance sheet and income statement. Once the reports are ready, circulate them across other departments for decision and strategy-making purposes. You can generate these reports manually or use accounting software to save time. These reports offer up-to-date transaction records and the status of your client’s business’s financial health at the end of the accounting period.
Challenges In Closing the Books and How to Overcome Them
Your accounting department works and improves the closing of books as a long-term and regular process. While working on closing the books, you will encounter multiple challenges that you must overcome. Therefore, you and your accounting department must identify the recurring issues and list them so that you can develop a process to address them.
Some of the regular challenges in closing the books are as follows
Inaccurate or Incomplete Financial Data
Incomplete and inaccurate financial data will create discrepancies in your financial statements and slows down the closing of books, therefore it is important to identify such data. Such errors can occur due to multiple reasons ranging from your errors from your client side to errors while transferring data from hard copies to soft copies.
Time Limits and Deadline Burden
Multiple accounting firms face the problem of a narrow time window at the end of the month for book closing which adds to their deadline pressure. On the other hand, your clients will be pushing for quick information for decision making but such time limits will increase the chances of errors and incomplete work. Your accounting teams need to distinguish what is important and what is essential to establish an achievable deadline for the closing process.
Complicated Reconciliation Process
The reconciliation process involves transferring hard copy data to digital platforms which can slow down the closing of books. When multiple platforms are at play, the exporting and importing processes to combine data will impede the process. Also, tracking the log-in information for each program can make book reconciling take longer time.
Taking Care of Multiple Accounts and Subsidiaries
When your team manages more accounts and subsidiaries that come under your client’s company, more complex will be your accounting become. As you try to close the books on all these accounts at the same time your work pressure and time constraints will multiply. Such a situation can lead to human errors while doing income statements and other accounting records.
These common challenges are sometimes too much to handle for your accounting teams and they will need a helping hand to tackle these challenges. That helping hand can come by choosing to outsource the closing of books. Through accounting outsourcing, you can outsource the challenging tasks of closing the books to an outsourcing service provider. This will reduce your headache and your talented team of accountants can focus on low-risk, repetitive aspects of the closing process.
How To Make Sure the Books Are Closed Correctly Every Month
Accounting firms should develop a step-by-step process with a checklist to ensure that they close the books every month. To achieve that you will have to start from where the errors start that is by checking thoroughly the preliminary statements, reconciling accounts, and adjusting journal entries to make the data up-to-date and accurate.
Always be on the lookout for challenges while doing the closing of books such as time limits and deadline burden, complex process, compliance requirements, deadline burden, and difficulties in managing multiple accounts. Also, while working on your book closing process focus on the benefits of accounting tools.
Conclusion
By creating and following the closing of book process step-by-step you can close the books promptly without facing many challenges. However, we understand that working on creating a closing process can divert your attention and resources away from your main task.
That’s why, you can lean on outsourced bookkeepers working for service providers like Corient Business Solutions. We specialise in offering tailored services for accounting practices. Our teams have vast experience in multiple payroll applications such as Sage, Brightpay, Xero, Moneysoft, Earnie, Star Payroll, and several others. You can design your practice an marketing edge in the market by using our book closing services, saving you time for other important tasks. We can connect at your convenience on a call or online meeting where we can discuss in detail about our services.