If you are a small business owner and are using a program like QuickBooks to run your accounting function, you are likely interfacing with your books on a daily or frequent basis, entering in transactions to invoice your customers, pay your vendors, and perhaps even to pay your employees. All of these transactions are feeding into your business' financial reports in the background, so that at the end of the month, you can run the reports and see how your business is operating.
The process of closing the books is a very standard monthly task that is performed either by a business' staff accountant or outsourced accounting services provided. This process allows you not only to review the transactions that have been put into the system to ensure that they are accurate but also allows you to make other adjustments to properly reflect the business' activity for the month. This Houston Chronicle article highlights some of the key steps of this process. See the following for a few key steps to follow in closing the books for your business.
Start with the Balance Sheet
The balance sheet is a point-in-time view of where your business stands at any given time, displaying cash, accounts receivable and other asset balances, as well as accounts payable, and other liability balances. In the equity section, you can see the amount of capital invested in the business, as well as the accumulated profits or losses in the business. Each account's ending balance as of the month-end date should be reconciled. For example, for your cash accounts and credit accounts, this means reconciling the activity to your statement for that month. For other accounts, you may need to make journal entry adjustments, as is discussed in the Houston Chronicle article, to adjust balances to accounts such as prepaid expenses or inventory. To learn how to properly record these entries, you may enlist the assistance of an accounting services provider or your CPA. After all adjustments have been made, review and confirm that the ending balances are accurate. Often, reconciliation schedules are created to support these numbers. The use of supporting reconciliation schedules is a best practice used by most businesses in closing the books.
Review the Profit & Loss Statement
Most accounting transactions and journal entry adjustments are creating the results on your profit & loss statement. Run this report and customize the view to compare this month against historical months. Review the trends on your revenue and expense line items. Make sure you are not missing any key transactions or adjustments and make sure that the transactions are recorded in the correct category.
Run Your Financial Statements & Analyze the Results
Now that you have closed your books, you can run the balance sheet and profit & loss statement for the month, and can also present this information to include monthly and even annual comparisons, or year to date results. This financial reporting package can also include other financial reports, and can be prepared by your internal team or your accounting services provider. Share the financial package with your management team and discuss the results. This process will allow you to identify potential issues in the business to be discussed and addresses. For example, your outstanding accounts receivables may be out of control, creating a cash flow issue, or your legal expenses are much higher than anticipated and you need to follow-up to determine what is driving this change. Closing your books in a timely basis gives you and your management team consistent reporting to keep a tight pulse on the business and to provide timely information to make the most informed business decisions.