How To Close The Books For Dummies. Financial Close In 15 Steps

Summary

The video script outlines a comprehensive guide for corporate controllers to ensure the accuracy and completeness of financial statements before issuance. It details a 16-step process starting from bank reconciliation to locking the period in accounting software, emphasizing the importance of regular reconciliations, expense recognition, and comparison of actuals to budget and prior periods to identify any discrepancies or anomalies. The guide serves as a valuable resource for accounting professionals looking to enhance their month-end closing procedures.

Takeaways

• 📋 The process of closing the books involves ensuring completeness and accuracy of financial records before issuing financial statements.
• 💼 As an accounting professional, you should regularly reconcile bank statements to capture unrecorded expenses and cash receipts.
• 🧾 Accounts Receivable should be reconciled by comparing invoices, purchase orders, and shipping notices to ensure all transactions are accounted for.
• 💹 Prepaid expenses must be tracked and amortized correctly to reflect accurate expenses in the current period.
• 📈 Inventory should be reconciled with warehouse reports and reviewed for obsolescence or expiration to adjust costs accurately.
• 🏢 Property, Plant, and Equipment (PP&E) requires regular review for capitalization, depreciation, and obsolete machinery.
• 💳 Accounts Payable must be ensured to be complete and reconciled with the trial balance and aged accounts payable to maintain cash flow accuracy.
• 💳 Credit card expenses should be reconciled for completeness and proper allocation of expenses to the correct accounts.
• 📊 Accrued expenses need to be recorded and tracked in an Excel file, with adjustments made as invoices are received.
• 💰 Deferred revenue must be managed by recognizing a liability for payments received but not yet earned, and amortizing it over the delivery period.
• 🔒 Long-term debt should be tracked outside the accounting software and reconciled with lender statements, with interest accrued as necessary.

Q & A

What does it mean to 'close the books' in the context of accounting?

Closing the books refers to the process of ensuring that all business transactions are accurately captured on the financial statements and that the books and records are complete and accurate on the accounting software, ready for the generation of financial statements.

Why is it important to perform a bank reconciliation?

Bank reconciliation is crucial for capturing any unrecorded expenses or cash applications from customers, ensuring that all financial transactions are accurately reflected in the financial statements. Without it, there is a risk of having expenses incurred by the business that are not captured on the income statement, leading to inaccuracies.

How often should one perform a bank reconciliation?

It is recommended to perform a bank reconciliation on a weekly basis rather than waiting until the end of the month. This helps to manage the volume of transactions and ensures that expenses and cash receipts are recorded promptly and accurately.

What is the purpose of reconciling accounts receivable?

Reconciling accounts receivable ensures completeness by comparing invoices issued to purchase orders and shipping notices. This process helps to confirm that all purchase orders have been shipped and fulfilled and that all shipments have been correctly invoiced, thereby ensuring accurate financial reporting.

How can one ensure completeness in a software or consumption-based service business?

In such businesses, one can perform a month-over-month customer analytics by comparing customer data or invoicing data from the current period, the previous period, and possibly the period before that. This helps to identify any fluctuations or anomalies and ensures that all transactions are accurately recorded.

What are the three key steps in managing property, plant, and equipment (PP&E) on the balance sheet?

The three key steps are: reviewing large purchases to ensure they are capitalized correctly, running depreciation to record the wear and tear of assets over time, and reviewing for obsolete machinery that may need to be written off.

Why is it important to reconcile accounts payable?

Reconciling accounts payable ensures that all vendor invoices have been received and recorded correctly. It helps to identify any discrepancies between the trial balance and the subledger, which if left unaddressed, can become more complex over time and potentially lead to inaccurate financial reporting.

What is the role of accrued expenses in the financial statements?

Accrued expenses represent expenses that have been incurred but not yet paid or invoiced. They are recognized as a liability to ensure that the financial statements accurately reflect the company's obligations and the true cost of operations for the period.

How does one handle deferred revenue in accounting?

Deferred revenue is managed by maintaining a table that shows the receipt of funds from customers for goods or services not yet delivered. This table is reviewed monthly to determine the portion of the deferred revenue that should be amortized and recognized as revenue in the current period.

What is the purpose of performing an actual versus budget analysis?

This analysis helps to identify any variances between what was budgeted and what actually occurred. It captures any items that may have been recorded in the budget but not in the actual financial statements, prompting further investigation and necessary adjustments to ensure the accuracy of the financial records.

Why is a period-over-period comparison useful in the financial closing process?

A period-over-period comparison helps to identify any anomalies or fluctuations in the financial data. By analyzing changes in key financial metrics over time, it can highlight areas that require further investigation, such as unexpected increases or decreases in expenses or revenues.