What separates a successful business from a failing one? I get this question all the time from aspiring entrepreneurs and business owners that are working diligently to get to the next level. The answer is extremely simple – systems. A successful business needs systems for on-boarding staff, allocating marketing spend, launching new products, and most importantly – generating financials.
Those outside of the world of accounting believe that generating financials is simply clicking a button on the computer. Yes, it can be a very minute task. However, the steps needed in the preparation of getting to where all it takes is ‘one-click’ are certainly more challenging and time-consuming.
To get to the one-click as mentioned above, a business must have a checklist to ensure their financials are correct. Some businesses have relatively simple lists, while others are more complicated. Some require a team of people and others simply require the owner to go through the list.
Below we will dive into all necessary items that need to be addressed for a small but growing business.
The month close checklist is extremely important and for that exact reason I spent a whole chapter of my book on this. For those who came here via different means, let’s take a look at the three main components of the checklist:
- Asset Account and Revenue Recognition (think assets)
- Accounts Payable and Liability Accounts (think liabilities)
- Reporting (think income statement)
Let’s take a deeper look at each individual section, the subsections and their associated tasks:
Asset Account and Revenue Recognition
- Reconcile Checking Accounts.
- Reconcile Savings Accounts.
- Reconcile Cash on Hand to ending amounts.
- Review uncleared checks and deposits to ensure accuracy.
- Accounts receivable aging total agrees with balance reflected on trial balance
- Identify significant account balances past due and document collection status.
- Determine whether any past due balances need to be written off.
- Review accounts receivable aging for any unapplied credits.
- Establish and record pre-paid expenses (e.g., insurance, interest expense, etc.) to recognize the expense in proper month.
- Review new purchases made in the previous month to verify they have been recorded properly with the correct depreciation schedule.
- Review disposals of fixed assets and remove from fixed asset records.
- Record depreciation expense for the current month.
- Post interest and dividend income to General Ledger
- Reconcile any investment activities for the period
- Perform perpetual inventory subledger review to ensure all goods activity confirmations were properly posted to the General Ledger.
- Review perpetual inventory listing for reasonableness (high quantities, high dollars, etc.)
- Determine if any excess, obsolete or planned end-of-life (EOL) inventory exists that needs to be written off or fully reserved.
- Ensure any other asset accounts are current and reconcile as necessary.
Accounts Payable and Liability Accounts
- Ensure all payroll journals are entered properly.
- Review all net checks to ensure a proper zero ending balance.
- Perform 3-way match (purchase order/receipt/invoice)
- Request Statement of Accounts (SOAs) from all applicable vendors.
- Verify vendor balances against the Statement of Accounts.
- Review AP aging for any unapplied credits.
- Close AP and post to General Ledger.
- Review AP and other payables for possible accrual.
- As applicable, analyze notes payable accounts (e.g., notes payable for mortgages or lines of credit) and post any unrecorded interest and principal outstanding; reconcile to statements received from source(s) of financing.
Sales Tax Payable
- Balances in accounts agree to respective sales tax reports filed the following month.
- Ensure any other liability accounts are current and reconcile as necessary.
Financial Reporting Activities
- Run preliminary budget-to-actual expense reports by department
- Review and analyze month-end financial data; record adjustments as necessary.
- Generate full final financial package and complete month-end financial statements for key stakeholders.
This is a great starting point for a business without an accounting month-end closing checklist.