What Does Closing The Books in Accounting Mean?

Jasmine Black
5 min read
What Does Closing The Books in Accounting Mean?

You've made money this month — fantastic! But you won't know exactly how much of that money you get to keep until you factor in what you've spent, what you still owe, and any upcoming expenses you need to plan for. 

Closing the books in accounting requires a process that reviews all your financial data, reconciles the accounts, and provides final totals that give you insight into your financial status.

But infrequent reconciliations, such as at the end of each month, can lead to some common challenges for finance departments. Consider the step-by-step requirements of closing the books and how you can tweak these for a reconciliation process that better serves your startup's needs.

Breaking Down The Concept Of Closing The Books

To close the accounting books means your finance team verifies your balances, finds and solves discrepancies, and creates a financial statement that demonstrates the financial status of your business. This process typically comes after the month ends, when the finance team reconciles accounts.

Closing the books regularly is essential to keeping your finger on the pulse of your startup’s finances. Streamlining this process can help improve your overall business performance by:

  • Providing timely financial data
  • Spotting issues and discrepancies early
  • Having financial data ready to share with investors, lenders, and external stakeholders
  • Providing insight into operations
  • Keeping financial records up-to-date
  • Reducing errors and fraud
  • Streamlining audit or due diligence requests
  • Limiting overwork at the month's end as staff attempts to close everything at once

The Process Of Closing The Books: Step-By-Step

To make the most of closing the books in your accounting process, you need a solid understanding of the procedures involved. Consider the following steps on how to close your books monthly.

1. Review Preliminary Financial Statements

Throughout the month, you'll collect financial statements, including receipts, bills of sale, and invoices.

To begin closing the books, review the financial statements that contain this information. Check income summary documents and the balances in temporary accounts to start.

2. Reconcile Accounts

You'll begin to reconcile your accounts with the information in your financial statements. The money you have should align with the money listed on these statements.

If there is a discrepancy, it will be your finance team's job to identify and confirm the cause. Automated bookkeeping can make these processes faster, eliminating time-consuming reconciliation tasks and assembling the results for you.

3. Adjust Journal Entries

As you sort out any discrepancies, you'll document any changes by adjusting journal entries. This is where you record any financial updates, such as a late bill that arrived and other updated accounts receivable.

This keeps your original journal entries intact for the sake of your records and consistency.

4. Prepare Closing Entries

To close out your journal for the month, prepare closing entries. This records the transfer of temporary account balances to permanent accounts.

This step logs these balances into permanent balance sheet records, formally adding the balances to the official financial data of the company.

5. Run Financial Reports

As one of your last steps, run the financial reports your colleagues in other departments need to form strategies and make decisions.

These reports will provide the most up-to-date transactions and details of your startup’s financial health.

6. Prepare For The Next Period

Set yourself up for the next period's closing by anticipating any of the issues you came across during this closing.

Any overlooked invoices should be added to your closing checklist. Closing entries and transferring temporary account balances to permanent accounts resets balances to zero for the coming financial period.

Common Challenges In Closing The Books And How To Overcome Them

Refining closing the books is a long-term project for many finance departments. They must contend with a variety of challenges and find solutions to avoid them.

Spotting regular issues can be a first step in pinning down a process that works for your department.

Incomplete Or Inaccurate Financial Data

Identify incomplete or inaccurate financial data that could slow down closing your books. Errors in financial data arise for several reasons, including client self-reported forms or transferring information from hard copies to digital versions.

Time Constraints And Deadline Pressure

For many companies, the narrow window at month's end for book closing can escalate deadline pressure. Leadership may need information quickly to fuel decision-making. But these time constraints can lead to rushed work and human error.  

Researchers in 2019 documented a significant correlation between the poor quality of accountants' work and tight deadlines. Finance teams may need to differentiate between what is possible and what is necessary to establish realistic deadlines for their closing process.

Complex Reconciliation Processes

Reconciliation processes relying on multiple platforms or transferring hard copy data to digital platforms can slow the closing of books. When multiple platforms are at play, complicated import and export processes to combine data may hang up any progress.

Similarly, keeping track of log-in information for each program can make reconciling the books take longer than necessary.

Managing Multiple Accounts And Subsidiaries

The more accounts your team manages and subsidiaries your company has under its umbrella, the more complex your accounting will become. As you try to close the books on all these accounts simultaneously, your time constraints and pressures are multiplied.

This can lead to increased difficulties and possible mistakes when assembling things like an income statement or other accounting records.

Compliance With Accounting Standards And Regulations

Meeting the accounting standards and regulations as expected can be time-consuming.

Finance teams must consider tax implications, audits, and due diligence requests. A developed bookkeeping process can help keep financial information available for compliance reasons and closing the books at the end of the financial period.

The Importance Of Real-Time Bookkeeping

To streamline your process for closing the books, consider a continuous close or real-time bookkeeping process. A real-time, continuous close means that you reconcile accounts on an ongoing, daily basis. The information is more accurate, and you always have a financial snapshot at the ready. All that's left to do at the end of the month is review and send your financial reports.

Engaging in real-time bookkeeping provides several advantages, including up-to-date financial data to support decision-making and help you spot errors early. You can automate reconciliation, saving your team time and reducing mistakes.

Less pressure on your finance team at the end of the month translates to more bandwidth for their other tasks and special projects.

How To Ensure Your Books Are Closed Properly Each Month

Your startup must develop a step-by-step process and accompanying checklist to ensure your books are closed properly every month. Tackling steps like reviewing preliminary statements, reconciling accounts, and adjusting journal entries will help you get your data straight.

To get the most out of your accounting process, confront common challenges before closing. Be on the lookout for dirty data, deadline pressures, overly complex processes, the difficulties of managing multiple accounts, and the need for compliance.

When developing your book closing process, consider the benefits of real-time bookkeeping with accounting tools. You'll have the most up-to-date information throughout accounting periods. You'll also reduce strain on your finance team.

Lean on tools like unified financial platforms and outsourced bookkeepers to develop this process and leave more time for your team to attend to the important, innovative tasks your startup is known for.

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