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.

Outlines

00:00

📚 Introduction to Closing the Books

This paragraph introduces the concept of closing the books in accounting, emphasizing the importance of ensuring all business transactions are accurately captured in financial statements. The speaker, an accounting manager, outlines the process of closing the books, which involves a series of steps to confirm the completeness and accuracy of financial records. The purpose is to enable confident issuance of financial statements, which are crucial for analyzing business performance.

05:00

🧾 Steps for Closing the Books

The speaker outlines a detailed process for closing the books, which includes 14-15 steps. The initial steps involve using previous financial statements as a reference and conducting a bank reconciliation to ensure all cash transactions are recorded. The process continues with reconciling accounts receivable, examining the aging of accounts, and reconciling prepaid expenses. The speaker emphasizes the importance of performing these steps on a weekly basis to avoid end-of-month backlogs and ensure accurate financial reporting.

10:01

🔍 Reconciling Balances and Inventory

This paragraph delves into reconciling the balance of accounts receivable with the general ledger and examining the aging of accounts. The speaker then discusses reconciling prepaid expenses, inventory, and property, plant, and equipment (PP&E). It highlights the need to review large purchases, run depreciation, and check for obsolete machinery. The importance of reviewing inventory against warehouse reports and assessing for obsolescence or expired goods is also stressed to maintain accurate financial records.

15:03

💼 Liabilities and Accruals Management

The speaker discusses managing liabilities and accruals, starting with accounts payable, ensuring completeness of recorded invoices, reconciliation of subledgers, and checking the aging report. The paragraph then covers credit card reconciliations, the importance of expense allocation, and the management of accrued expenses, including maintaining an Excel file for tracking. Additionally, the speaker explains the handling of deferred revenue, which involves recognizing a liability for goods or services not yet delivered, and the need for monthly review and amortization of these amounts.

📈 Financial Analysis and Period Locking

The final steps in closing the books involve analyzing revenue and expenses, ensuring they are recorded in accordance with accrual accounting principles. The speaker describes the process of reviewing open purchase orders to identify any unrecorded expenses and conducting a budget versus actual analysis to capture any discrepancies. A period-over-period comparison is recommended to identify anomalies in accounting. The paragraph concludes with the step of locking the period in accounting software to prevent further changes, signifying the completion of the financial closing process.

Keywords

💡Bank Reconciliation

Bank reconciliation is the process of comparing the ending balance on a company's books with the corresponding balance on the bank statement to ensure that all transactions are accurately recorded. In the context of the video, it is a crucial step in closing the books as it helps capture any unrecorded expenses or cash applications, ensuring the completeness and accuracy of financial records. An example from the script is the recommendation to perform bank reconciliation on a weekly basis to avoid a large volume of transactions at month-end.

💡Accounts Receivable

Accounts receivable (AR) refers to the money owed to a company by its customers for goods or services provided on credit. In the video, the speaker emphasizes the importance of reconciling AR to ensure completeness, which involves invoicing customers accurately and timely. The process includes comparing invoices issued, purchase orders received, and shipping notices to confirm that all sales have been recorded and all shipments have been billed. The script also mentions examining AR aging to follow up on customers who are not paying on time.

💡Prepaid Expenses

Prepaid expenses are costs paid in advance for goods or services that will be received in the future. In the video, the controller suggests maintaining an external Excel file to track prepaid expenses and ensuring that these expenses are properly amortized over the period they relate to. This process is part of the closing procedures to ensure that the balance sheet accurately reflects the company's financial position by not overstating these prepayments.

💡Inventory

Inventory refers to the goods and materials held by a business for sale in the ordinary course of business. In the context of the video, the speaker advises performing a monthly reconciliation of inventory with the warehouse report to ensure that the quantities recorded in the accounting system match the physical stock. This is important for financial accuracy and to prevent discrepancies that could be identified by auditors, as well as to identify any obsolete or expired goods that need to be written off.

💡Property, Plant, and Equipment (PP&E)

PP&E encompasses long-term tangible assets that a company uses in its operations, such as buildings, machinery, and equipment. In the video, the controller highlights the need to review large purchases to ensure they are capitalized correctly, run depreciation to allocate the cost of these assets over their useful life, and review for obsolete machinery that may need to be written off. These steps are essential for accurately reflecting the company's assets and expenses on the financial statements.

💡Accounts Payable

Accounts payable (AP) represents the amounts a company owes to its suppliers for goods and services received on credit. In the video, the controller emphasizes the importance of ensuring that all vendor invoices have been received and recorded, reconciling the trial balance with the subledger, and checking the aging report to ensure timely payments. These steps help maintain the company's financial health and relationships with vendors by avoiding unnecessary inflation of cash balances and late payments.

💡Accrued Expenses

Accrued expenses are liabilities that represent expenses incurred but not yet paid or billed. In the video, the controller advises maintaining an Excel file to track accruals and reviewing it monthly to ensure that no amounts are aged that should be reversed. This process is critical for matching expenses to the periods in which they are incurred, in accordance with accrual accounting principles, and for maintaining the accuracy of financial statements.

💡Deferred Revenue

Deferred revenue is a liability that arises when a company receives payment for goods or services that have not yet been delivered. In the video, the controller explains the need to maintain a table showing receipts from customers and to review this table monthly to determine the amounts that should be amortized as revenue. This ensures that revenue is recognized in the correct accounting period, in accordance with the principles of revenue recognition.

💡Long-term Debt

Long-term debt refers to loans or other borrowings that have a term longer than one year. In the video, the controller discusses the importance of maintaining a record of these loans, reconciling them with the lender's statements, and recognizing the interest expense as it accrues. This ensures that the company's financial position is accurately reflected and that debt obligations are properly accounted for on the balance sheet.

💡Revenue Recognition

Revenue recognition is the process of recording revenue in the period in which it is earned, as opposed to when it is billed or cash is received. In the video, the controller explains that this is based on the fulfillment of performance obligations as per accounting standards, such as ASC 606. The process involves analyzing revenue by customer to identify any adjustments needed for accrual accounting, ensuring that revenue is recognized when it is earned and not just when invoiced or paid.

💡Expense Accrual

Expense accrual is the accounting practice of recording an expense in the period it is incurred, regardless of when the payment is made or received. In the video, the controller describes the need to identify expense accounts that require accrual adjustments at the month's end, such as payroll expenses that have been incurred but not yet paid. This process is essential for the accurate reflection of a company's financial performance and compliance with accrual accounting principles.

💡Budget Analysis

Budget analysis involves comparing actual financial results with the budgeted amounts to identify variances and understand the reasons behind them. In the video, the controller suggests performing an actual versus budget analysis to capture any items that were recorded in the budget but not in the actual financial statements, which can prompt questions and lead to the identification of accounting anomalies. This analysis helps in financial planning and control by ensuring that budgeted expenses are aligned with actual expenses incurred.

Highlights

Closing the books involves ensuring all business transactions are accurately captured on financial statements.

Bank reconciliation is crucial to capture unrecorded expenses or cash receipts.

Reconciling accounts receivable ensures completeness of invoices issued and received.

Prepaid expenses should be tracked and amortized as the expense is incurred.

Inventory reconciliation with warehouse reports is necessary to identify any discrepancies.

Reviewing property, plant, and equipment for large purchases, depreciation, and obsolescence is vital.

Ensuring all vendor invoices are received and recorded for accounts payable is important for accuracy.

Credit card statements must be reconciled for completeness of expenses.

Accrued expenses represent incurred costs not yet paid and require monthly review and reversal if invoiced.

Deferred revenue must be tracked and amortized over the period to which it relates.

Long-term debt requires tracking of loans, payments, and interest accruals.

Revenue recognition should follow the guidelines of accounting standards to ensure accuracy.

Expenses should be reviewed for accrual adjustments to match the period in which they are incurred.

Open purchase order reports help identify expenses that need to be recorded but have not yet been invoiced.

Budget versus actual analysis can reveal discrepancies and prompt necessary accruals.

Period over period comparison helps identify anomalies in accounting and financial performance.

Locking the period in accounting software prevents further changes once the books are closed.

Transcripts

hey guys welcome back to another video

before i close the books and issue

financial statements there is a series

of steps that i take as a corporate

controller to make sure that the all of

the business transactions are captured

on the financial statements and in this

video i wanted to create a comprehensive

guide of all of the steps all the things

you have to visit before you go ahead

and issue financial statements with

confidence

[Music]

hey guys welcome back to another

accounting lecture bill hannah here in

today's video we'll be focusing on

period and closing or closing the books

and what it means to close the books and

generate financial statements and if you

go back in time when accounting was done

in actual physical paper and columnar

pages closing the books literally meant

that you entered all of your expenses

and all your revenue and you're ready to

literally take the book and actually

close it right but what we say today

when we say close the books what we mean

is that your books and records are

complete on the accounting software and

that you're ready to generate financial

statements so it's all about

completeness and accuracy of the books

and records that is closing the books

and so as you go up in the letter of an

accounting manager assistant controller

and a controller and you get to my

position today as a cobra controller

you'll find that your cfo will come to

you maybe day five or six of the months

and say are we closed for the previous

months are we done are we closed with

the books and the reason why is because

everybody's eager to download the

financial statements and begin to

analyze the performance of the business

so this is briefly what it means to

close the books and what we'll do in

this lecture is i want to break it down

to maybe 14 or 15 steps that you can

take to close the books and records all

right so to simplify the process for you

because at the end of the day it's

really easy right we're not really

launching rockets into space right this

is pretty easy stuff so what we'll do is

you grab a copy of the financial

statements from the previous period

right so grab a copy of the balance

sheet and a copy of the income statement

and we'll go through the main accounts

and talk about the things that you need

to do to close the books all right so

we'll grab a copy of the balance sheet

from the previous period and look at it

and the first section on the current

assets you'll find cash and cash

equivalents and what you need to do here

is a bank reconciliation and what a bank

reconciliation is is grabbing the ending

balance from the bank statement and

reconciling it to what you have on your

books and records right so what that

allows you to do is capture any

unrecorded expenses or any cash

application that's coming in cash

receipts from customer to close out

accounts receivable right if you don't

do a bank reconciliation what you're

going to end up with is that you're

going to have expenses that have been

incurred whether by the business and not

being captured on the income statement

right so this is the risk here if you

don't reconcile the banking statement so

that's the first thing you have to do

and my pro tip on this one is that you

do it on a weekly basis don't wait till

month end to reconcile the bank because

then your a you'll end up with a large

volume of transactions that you need to

record in terms of expenses or cash

receipts from customers my

recommendation is to do it on a weekly

basis a preliminary reconciliation in

your accounting software while you enter

in the balance and then begin to apply

expenses and and cash receipts from

customers as you receive it on a weekly

basis so that's what you do for cash

step two is to reconcile accounts

receivable and when you look at accounts

receivable the reason why you want to

reconcile it it's very similar to the

concept of reconciling the bank

statement it's all about completeness

with the bank statement you're making

sure that all the transactions are

complete on your books and records with

accounts receivable you're also

concerned with completeness and with

completeness here means that you invoice

the customers you need to invoice right

so your billing process could be if you

are a product product based business you

are issuing an invoice every time you

ship a product right so that's if you

have a product based business if you

have a software business for example

maybe you're issuing only one monthly

invoices or annual invoice for the

period covering the whole period right

whatever the case is so if you have a

business that ships a product what you

need to do for completeness is to

compare a list of invoices in a period

that you issued to a list of purchase

orders from the customers to a list of

shipping notices from the warehouse

let's say like a three-way check list of

invoices that you issued purchase orders

two shipping notices to make sure that

all of the purchase orders that you

received have been shipped and fulfilled

and then all of the ship shipment and

fulfillment have been invoiced

accordingly right so this is a three or

three-way match you can do to ensure

completeness uh if you have a software

business for example or a consumption

based service business you can do a

month over months customer analytics so

you grab

your customer data or your invoicing

data for this current period the

previous period and maybe the previous

the period previous to that and do a

three period comparison uh and then

you'll see any kind of fluctuation any

hills or valleys to capture any

anomalies and that will help you capture

anything that's incomplete so that's in

terms of completeness and then what you

can do after that is reconcile the aging

sub ledger so you take the subledger

which is your ledger by customer and

reconcile it to the general ledger uh

which is the balance on your trial

balance to make sure equal each other

because if they don't equal each other

and there is a reconciling item you're

better off catching it now than waiting

down the line and having to go back to

previous videos to reconcile so

reconciling your balance in a trial

balance to your sub ledger is really

important here

and then the final thing to do for ar is

examining ar aging so downloading ar

aging by bucket um you know current 30

days plus 60 days plus and looking at

your customers who are not paying you

and following up to make sure that

you're receiving the cash on time and by

the way all of these items here are

addressed in detail in the controller

academy link in the description below

step three is to reconcile prepaid

expenses and as you can see we are going

down the balance sheet accounts right

now so we are at prepaid expenses and

for prepaid expenses you should keep an

excel file an outside excel file showing

the items from the vendor that you've

received that are prepaid and this is

what that means is that this is an

expense of the future that you pre-paid

today so it lives on the balance sheet

rather than the income statement right

and as you then incur the actual expense

in the future then you begin to amortize

the prepaid expenses so what you should

do

for this year is to look at the excel

file for reasonableness right you go

through it item by item and see uh

you're amortizing correctly you're

booking an amortizing journal entry on

your books and records to recognize any

expense that already got incurred in

this current period and make sure it

reconciles and it's reasonable at month

end all right one important pro tip here

is to develop a month enclosed checklist

or a closed calendar so i'm going to

leave a link down below to a video i

made on how to develop the checklist and

also a link to an excel file of a sample

checklist you can download and begin to

use it yourself today okay number four

is inventory and whether you're

maintaining your list of inventory by

sku in the accounting erp software or in

excel you should be doing a month in

reconciliation to the warehouse report

so you should

contact the warehouse each month and get

a listing by skew of the quantities of

the inventory and reconcile that to what

you have on your books and records

because if you don't do that and you

have some sort of discrepancy you're not

catching then the auditor when they come

in they'll catch that discrepancy and

you have to write it off so you're

better off doing it yourself and

reconciling to the warehouse to catch

any differences and then you should also

review for obsolescence and expired

goods so you should always get if you're

selling for example perishable goods or

some items that have an expiration date

you should always look at it by skew buy

a bucket of expiration a month end to

determine if there are any write-offs

that you have to do you have to write

down inventory maybe the cost of goods

sold if you have expired goods or

obsolete goods so two things reconcile

to warehouse reconcile aging for expired

items number five is pp and e or

property plant and equipment and this is

your factory buildings your machinery

your laptops and all this good stuff and

what you should be doing here are three

things number one review for large

purchases that needs to be capitalized

in a period so maybe you do that by

reviewing accounts payable or speaking

to somebody from accounts payable team

and making sure that every purchase that

is large enough to be capitalized under

the company's fixed asset policy is

being capitalized correctly on the books

number one number two is to run

depreciation and if you're running sap

or netsuite large enough erp software

that's literally a push of a button that

will run depreciation for you

if not if you're using like quickbooks

online you might have to run

depreciation in excel and then take the

je or journal entry from excel and book

it into your accounting software number

three is to review for obsolete um

property or machinery so for example if

you have any

machinery that's not being utilized

anymore that's obsolete uh you might

need to write that off uh to the p l the

three things review large purchases run

depreciation and review for obsolete

machinery

all right up next and under current

liabilities we'll encounter accounts

payable so you need to do three things

here the first one is to ensure that all

vendor invoices have been received and

recorded and a lot of times what you

have is an inbox like maybe ap at

xyz.com your ap email that receives all

the vendor invoices so just making sure

that you review that inbox and double

check that all of the the vendor

invoices in there have been recorded on

the books and records this number one

number two is a reconciliation between

the trial balance and your subledger so

take the amount of balance of ap from

the tri balance reconcile it to your

subledger or your aging and ap by vendor

to make sure the balance ties because if

it doesn't it means you have a

difference that you should resolve now

rather than to wait a few periods and

then it becomes more complex as the

snowball gets bigger and bigger right so

you should tackle it early number three

is to check the aging ap aging and make

sure that there is nothing that's being

aged

that for example if you owe a vendor a

certain amount of money uh within a

certain period of time you should pay to

them because if you don't uh you're

inflating the cash balance unnecessarily

on your books and you're building maybe

um breaking down the relationship with

vendors so you should be paying on time

within the credit

uh term or the payment term that you

have with the vendor so three things uh

ensure completeness of when the invoice

is recorded two reconciliation sub

ledger three check the aging report all

right number seven as we go down the

list on the balance sheet here under

current liabilities is credit cards so

for credit cards just like bank

statements we're concerned with

completeness so what you should be doing

is reconciling the balance when you book

some records to the balance on the

credit card statement a month end and

oftentimes what you do is you have a

feed a bank feed or and whether it's a

csv upload or an actual api feed from

the bank into your accounting software

that just feeds in the information and

it gets recorded on your books and

records and you're just what you do is

you're making sure that the expense

accounts allocated to each line item is

correct you go in and you review the

nature of the expense and you assign to

the right expense line item right so

completeness and reconciliation a month

end of credit cards credit cards are

often issued to executives uh certain

buyers around the company have credit

cards so make sure you have a good

listing of the credit cards that are

being used and reconcile those on a

monthly basis number eight as we go down

the list is accrued expenses and what

accrued expenses is is a liability to

represent the expenses that you incurred

but you haven't yet paid the vendors

right so maybe you're in current expense

today but you haven't been invoiced yet

so it's not an accounts payable yet

but you're recognizing a liability here

by debiting the expense and crediting

the liability account so what you should

be doing for this is that you should be

maintaining an excel file with all of

your vendors that you have accrual for

and you review it on a monthly basis uh

a for reasonableness to check that

nothing is aged on it that should be

reversed and uh b is for reversals so to

check on it line by line and see if you

receive the vendor invoice and you

booked it to ap you should be reversing

out of this account because it shouldn't

live in two places it should only live

either in accurate expenses or accounts

payable if you receive the vendor

invoice you have to reverse the accrual

here uh so two things to maintain an

excel file and secondly is to reverse

any accrual that's been already invoiced

by the vendor and number nine as we go

down the list is deferred revenue or

sometimes referred to as unearned

revenue and the reason why it's a

liability is because you receive maybe

some funds from a customer and you

haven't yet delivered the good or the

service see what you're recognizing here

is a liability or an obligation

that you uh will have to deliver this

good or service in the future so what

you should be doing is maintain an excel

table for this to show by customer and

by payment to show what you received and

then secondly is to review on a monthly

basis this table here for reasonableness

line by line to see what you need to

amortize and so an example is let's say

you receive a hundred thousand dollars

for an entire year of platform fees from

a customer and you need to amortize that

on 12 months so what you should be doing

is going into excel file and amortizing

the 100k over a whole year and then

record as revenue recognize the revenue

to the p l every month for the one

twelfth of the hundred thousand dollars

as an example so deferred revenue is

under and revenue you should be

maintaining a table outside of the arp

software uh and then reviewing and

amortizing uh the line items on a

monthly basis all right number 10 is

long-term debt and this is for loans or

business loans that have a term longer

than a year or 12 months that's why it's

long term right

with that you need to be maintaining a

table outside of europe software to show

that the number of loans that you have

outstanding and then reconcile those to

the statement from the lender uh just to

make sure they're capturing any uh

payments that you're paying down maybe

your loans and you need to record a

journal entry to recognize the reduction

in cash and reduction in long-term

liability right so review the table that

you have and then for the interest on

these loans you might be having to for

example if you owe an interest on the

loan but you haven't paid it yet then

you need to be recording an accrual for

that interest

okay that's long-term debt all right so

with that we're done with the balance

sheet and now we can move to the income

statement and the income statement

really we're going to just break it down

to step number 11 which is revenue and

step 12 which is expenses so for revenue

what i do is is i download a report of

revenue for the month by customer and i

go through it and analyze to see if

there are any things that need to be

adjusted for accrual accounting right

and accrual accounting says that you

record revenue as you earn it not when

you invoice it or not when you receive

the cash but when you earn the revenue

and earning the revenue is very specific

and it's based on asc or accounting

standard qualification 606 uh that has

rules around when to recognize revenue

and it's mainly around the idea of

earning a revenue and fulfilling the

performance obligation so the best way

is to download a list of revenue by

customer and go through it and identify

some of these problematic customers that

has specific clauses in their contracts

that require some accrual adjustment to

revenue so that's 11 or revenue and then

for step 12 it's going to be analyzing

the expenses so look at your expense

accounts for operating expenses and what

i do for expenses is to look at the

expense accounts by gl accounts like the

detailed gl accounts which shows payroll

expense vacation expense software

expense marketing all of these things

right and begin to identify the expense

accounts that require an accrual

adjustment a month end and accrual uh

says that an expense is recorded when

the expense is incurred right not when

the expense is paid or not when the

invoice is received from a vendor but

when the actual expense itself or the

service from the vendor or from the

employee has been rendered right so an

example is if you look at payroll

expenses and let's say you're paying

your payroll on a two-week cadence right

so you have two weeks in the period two

weeks plus two weeks and then you have

maybe two or three days toward the end

of the period that you need to accrue

for as a debit to payroll expense and a

credit to accrued payroll right so

identifying these expenses that require

an accrual of monthly end that's step

number 12.

step 13 is going to be to review an open

purchase order report and what i mean by

that is that you download a listing of

all of the purchase orders with any

company uh that haven't been invoiced by

the vendor you haven't received an

invoice from the vendor yet against it

right what that allows you to do is to

figure out if there is any expense that

have been incurred during the period

that needs to be recorded on the books

and records if the service have been say

significantly completed by the vendor

but you haven't yet received an invoice

from the vendor right so i highly

recommend implementing a system of

purchase order with the purchase orders

within your company uh whether you're

buying inventory or maybe only if you're

buying uh

software services marketing services or

anything like that uh because that

allows you for two things number one is

to control spend so you're always

approving your spend before it happens

not after it happens right

and then secondly it allows you for this

to have a correct accounting because

then if you have a po process then you

can download an open po report of

montand and double check it against your

accounts payable to make sure that you

have accruals that are correct at month

end so step number 13 is to review and

open purchase order report all right so

now we're at step 14 now we're pretty

much almost done we now have all or

almost all of the transaction are

complete on the books of records step

number 14 is going to be to perform an

actual versus budget analysis so now

that you're almost comfortable that

everything is already recorded on the

books and records you download a set of

financial statements and you do an

actual to budget comparison what that

allows you to do is to capture any items

maybe recorded in the budget but not in

the actual financial statements that

might prompt a question and then you say

huh here i have a marketing expense in

the budget for 20k but i don't see that

in the financial statements there's

something changed in the plan so you

reach out to the marketing person you

say that something change in the budget

and you might say yeah well the 20k it's

not going to be spent now it's going to

be spent down the line then you're fine

then it's okay i don't have to accrue

anything but what that might uh discover

is that if the 20k has been budgeted for

but you don't see it in the actual

results you reach out to the marketing

person use he'll say well yeah we have

the service has been incurred and it

needs to be recorded but uh there is no

po for it and there's no vendor invoice

but the service has been uh rendered by

the vendor right so that that will uh

enable you to do an accrual for that

service in this case so doing a budget

to actual analysis will allow you to

figure out any of these variances that

will help you catch accounting anomalies

step 15 and we're almost done here is to

do a period over period comparison so

download the financial statements if

you're doing a monthly close then you

download four months including the

current monthly closing and you do a

comparison a fluctuation analysis to

capture any anomalies so for example for

payroll if you do an analysis that shows

the payroll have gone up by say five

percent right so what you should be

asking is did my head count increase uh

by five percent to prompt increase in

payroll by five percent

and then if you look at heck count and

it went up by five percent then you're

like okay that makes sense then but if

your head count went up by say 20

and you're looking at payroll and went

up only by five percent well then

something is wrong here right so you see

a period over period analysis is really

helpful in capturing anomalies in the

accounting step 16 or the final step is

to lock the period in the accounting

software so that no more changes are

being done either by accident or on

purpose by the accounting staff no more

changes so you need to lock the period

once you're satisfied

you