As a small business owner, or administrative employee, you should be very familiar with the term accounting closing. We are talking about the process in which the accounts are settled for the preparation of financial reports and the beginning of a new economic period.
The accounting closing is a process that can be carried out on a monthly, quarterly, semi-annual or annual basis, depending on the company’s needs. However, with the advances of accounting software and computer systems, today it is a task that can be carried out every month for better control.
Decades ago, the process of accounting closing used to take weeks of hard work, a detailed review of physical books and manual reconciliations.
Today, companies, even small businesses, no longer close actual books. Everything must be carried out digitally with computer tools that reduce the tasks of accounting closing from weeks to a couple of days and make the process less complex and manual.
There are several good practices that you must take into account for an adequate accounting closing, since they will make the process much simpler and more accurate. That is just what we want to share in this post.
Learn how an accountant can help you in the planning process in your business.
Why the accounting closing and what happens during the process?
Accounting is cyclical, whether it’s a corporation, a small business, or a nonprofit (NPO), closing the books is universally important.
It is the process that will allow to summarize the income, expenses, debts, accounts receivable and profits of the business through the financial statements.
Once each accounting period is over and the closing is done, companies start again: They generate income incur expenses, track each and every one of the transactions they carry out to finally create reports that analyze all those transactions.
It’s about the accounting cycle and the closing is part of that cycle. During this process the accounting team will:
- compile all financial transactions.
- ensure that all charges and credits are assigned to the correct accounts.
- separate between permanent and temporary accounts.
- correct any errors or omissions.
- present the financial statements.
- and prepare the books to start over.
During the accounting closing process, the temporary accounts, or results accounts (income and expenses) “close”, starting at zero for the next period.
The final result or balance between income and expenses is transferred to the retained earnings, or capital accounts on the balance sheet, depending on the type of entity.
On the other hand, the permanent accounts, or balance sheet accounts, will reflect the cumulative total for the business.
Now that we know part of the procedure, let’s review some practices to consider for an appropriate accounting closing.
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Best practices for an appropriate accounting closing
An efficient accounting closing process improves controls and reduces the risk that the reports submitted do not faithfully reflect the economic-financial situation of the company.
Simplifying this process also puts accurate financial information in the hands of stakeholders in the shortest time possible, thus facilitating its analysis and timely decision-making.
Let’s look at some practices that you should take into account for an appropriate accounting closing.
· Forecasting is key
When management is forward-looking, many tasks are organized in advance.
For example, never wait until the days before closing to order a bank reconciliation, it is an almost automated task that you can carry out month by month. More frequent reconciliations will reduce time and efforts.
Get into the habit of digitizing the transaction receipts and handle as little as possible on paper, so you will avoid losses, excessive manual recording and storage space.
Create a security backup of all this evidence and remember that you can count on accounting software or ERP solutions managed in the cloud.
Throughout the accounting cycle, create a checklist of all tasks and assignments that need to be controlled and streamlined in preparation for the closing.
· Put the business model into context
It may be evident to many small business owners, but not to an accountant who is just starting out in the company.
It is very different to coordinate the accounting closing of a small manufacturing business than a credit union or a professional services firm.
The portfolio of larger accounts receivables of a manufacturing company is not the same as the credit union’s. A hotel operator’s accounts chart is not the same as an online service company.
It’s critical to know the types of transactions you’re dealing with to determine if you can fully automate them or if you need to allocate time and effort to a manual review.
· Set a sensible timeframe
The time it takes to perform an appropriate accounting closing will depend on many variables:
- The business model and complexity.
- Expertise of the accountant or accounting team.
- Number of staff dedicated to it.
- The degree of connection, communication and commitment of the different areas.
- Level of automation of administrative processes.
- Sophistication of systems: accounting software, on-premises ERP or an ERP in the cloud.
- Internal procedures, decisions of the management team and the finance area.
In 2019, an investigation by the firm Ventana Research, of Oregon, on companies of different sectors and sizes, revealed that the average time of an accounting closing is 4 days for 46% of the companies evaluated, while 49% complete the closing in 7 days or more.
Keep in mind that a “fast and clean” accounting closing is a key measure of the efficiency of the accounting area and management in general.
· Attentiveness to the accounts chart
In accounting, the accounts chart is essential to properly organize and report on the different sources of income and categories of expenses that affect the business.
However, for several reasons it is common for an accounts chart to get out of control. Throughout the year, adding new accounts can be an important part of achieving accuracy and traceability.
But continually modifying the accounts chart can get out of control, something that results in a messy system that doesn’t align with the need to track income and expenses, affecting the closing process in terms of time and complexity.
Then, in a proactive way, make sure that policies are set on who should modify the accounts chart and for what concept. Take some time to ensure it’s up-to-date and accurate.
Make sure all of your employees understand which accounts correspond to which transactions so that all the details are included in the correct records and an accurate end result is generated.
· Training and empowerment
Get to know your support staff and empower them according to their capacities. Not all employees on your team will have exactly the same responsibilities and professional status but getting their commitment can improve closing procedures.
In this sense, opt for the rotation of roles, your collaborators can take turns to identify the individual deficiencies in the closing tasks and the possible solutions.
It’s a tactic that encourages cross-training and collaboration, and it also encourages each team member to play a more active role in the process.
· Commitment of all
Another reflection: The closing is not the exclusive commitment of the accounting team.
A purchase order processed erroneously by the warehouse, excessive waste not accounted for in the production area, a poor collection tracking by the sales department or problems with payroll, will affect the accuracy of the reports generated.
Definitely, the lack of connection and commitment between the different functional areas of a business affects the results, and even the number of days it takes to complete an accounting cycle.
In this regard, creating awareness in the different roles and an image of neatness in each of the business processes is fundamental.
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The accounting closing is part of the natural economic cycle of any company and should not be a cause for tension or strenuous extraordinary work, which can be avoided if careful preparation and forecasting is carried out.
Embracing technology, leveraging automation, creating security backups, time management and the correct delegation of tasks in the hands of a prepared and organized team can generate a “clean and efficient” result.
Finally, the right advice from experts can help you make decisions at the management and systems level to make your accounting closing process is ideal.
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