23 Mar How to Close the Books Fast
Closing the books is a perpetual headache for many accounting departments. Without some amount of automation it can be like herding cats. If you are relatively new to the process you’re in the right place. First, we’re looking at what closing the books means, why it’s important and what the basic steps are. Then we will look at some tips to optimize and close the books faster and minimize your headache every month.
What Does Close the Books Mean in Accounting?
Closing the books is a financial process in which the accounting team verifies and adjusts account balances at the end of a given time period. Many companies close their books monthly, quarterly and annually. This means reconciling financials and producing reports for the given period. These reports reflect the company’s true financial position and inform stakeholders, including management, investors, lenders, shareholders and regulatory agencies such as the SEC.
Why is it Important to Close the Books?
Closing out your books at the end of a period is so important because it allows you to prepare important financial statements, plus you gain an accurate view of your financial status so you can plan for the future.
How to Close the Books in 8 Steps
These are basic steps to close the books. This is not professional accounting advice, but these steps should give a good idea of the procedure for closing out a period.
- Post Journal Entries to General Ledger: Post account totals from your journals to the appropriate General Ledger (GL) account. These journals include sales and cash receipts and cash disbursements journals.
- Sum Up Your GL Accounts: To get a preliminary ending balance in each of your GL accounts, add up all your transactions for each GL account.
- Preliminary Trial Balance: A trial balance adds up your total credits and debits. Sum up your ending balances for each of your GL accounts. Your total debits and credits should be equal.
- Adjusting Journal Entries: Before you close the books, adjustments must be made for items that aren’t recorded as daily transactions. These include accrual of real estate taxes, depreciation accrual etc., for the period.
- Adjusted Trial Balance: Once adjusted journal entries have been made, sum up your GL accounts again to get your updated trial balance. Again, your debits and credits should be equal.
- Prepare Financial Statements: If your debits and credits are equal, you are ready to create a balance sheet and income statement. These are also referred to as a profit and loss report or P&L.
- Closing Entries: Closing entries allow you to zero out your revenue and expense accounts by transferring balances from these temporary accounts to permanent accounts such as the retained earnings or owner’s equity account. Zeroing out accounts is important to starting the next period fresh.
- Prepare Final Trial Balance: Now that your revenue and expense accounts have been zeroed out, your final trial balance will reflect your balance sheet account. The total debits and credits should match again. You’re ready for the next period.
Preparing Financial Statements
For most small businesses the balance sheet and income statement are key statements prepared for end-of period reporting. An enterprise resource planning solution or other accounting software can make generating these statements simple. However, you may be required to hire a professional accountant to prepare your financial statements if you are reporting to a third party or regulatory agency. Go cloud with ERP Hosting Services
How to Close the Books Fast
For many organizations, closing the books is a necessary and recurring headache. Just when you’ve come up for air from closing out one month, the wave of the next month’s close is already pushing you back under water. But you can close the book faster and prepare financial reports that help drive decision making and increase the strategic value of your accounting department.
The secret sauce to closing the books is equal parts planning and execution.
Preparing and planning a period close can be the missing ingredient to fast period closings, according to a recent article from Sage. “The secret sauce to closing the books is equal parts planning and execution. The planning part is often what’s missed and deserves a spotlight,” said the Sage article. Below are six tips they offer to close the books faster.
1. Understand Why
Increasing the speed of any business process can save money, but when it comes to closing the books there may be other motivators. For example, you may want to speed the process in order to reflect the timeliest financial position of the company to inform better decision making. Whatever the reason, clearly defined goals are critical to success.
2. Get Buy-In
From expense receipts and invoice approvals to time sheets, having your entire organization understand the importance of timeliness is key. Getting buy-in across the organization helps ensure a faster close.
3. Know Your Audience
Who are you preparing reports for–internal leadership, investors, shareholders? What are the key metrics they want to see? Knowing this ahead of time will help you focus and prioritize.
4. Optimize for what Matters
If, for example, your accounts payable department makes up the bulk of your paid expenses, having a streamlined AP process can significantly reduce the amount of time you spend closing the books each month. On the other hand, if expense reports are materially unimportant, it might not be effective to spend a lot of time chasing them down early in the closing process. Identifying and optimizing for these priorities is important for speeding up any period close.
5. Automate and Innovate
Audit your entire process to understand the areas where manual processes are consuming the most time. With the right ERP package it should be easy to automate you process for period closings, including management of revenue earn-out schedules, amortization and depreciation. Many accounting solutions come with standard reports built-in. You should also be able to innovate to create custom report automation where necessary. With automated report scheduling you can avoid a lot of time-consuming prep. Other software solutions may become increasingly important as you grow. Purpose built solutions like Payables and Receivables Automation, Time and Expense Tracking and Paperless Processing may become necessary to close the books efficiently each period.
Continue to Reevaluate and Improve
After each period close, evaluate how the process went and look for areas to improve the next time. Tracking period closings over time will give you a better view of your process so you can continue to improve and reduce your time to close the books.
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