Another month in the books…but now it is time to reconcile and close out the previous month. By the time your accounting team has ironed out and finalized the previous month, it’s on to the next.
Another month in the books…but now it is time to reconcile and close out the previous month. By the time your accounting team has ironed out and finalized the previous month, it’s on to the next. The month-end closing cycle is an area where businesses can struggle with finding the balance between dedicating too much resources and not doing quite enough. We will identify and explain the two basic fundamental approaches to closing the books for a period: 1) the hard close, & 2) the soft close, as well as outline some key considerations to make when choosing which approach to implement.
The Hard Close Approach:
Under the hard close, a company aims to treat that month almost as a “year-end”. Your accounting staff is reconciling the balance sheet accounts (receivables, payables, other accruals, deferred/unearned revenue, etc.) and honing in on the corresponding revenue/expense cutoff as it applies to the income statement. Whatever the duration of your month-end closing process, the previous month’s books stay open in the accounting system so the appropriate entries can retroactively be made to true-up the end of that month. The benefit for doing this every month is that the company ultimately produces generally accepted accounting principles (“GAAP”) full-accrual basis financial statements for every single month. Management can use this information to make important business decisions. The drawback is the time-consuming nature of this process and the resources devoted to executing it.
The Soft Close Approach:
In contrast, a company can utilize a soft close process, whereas the accounting team eliminates a significant portion of the month-end close reconciliation process. Under soft close, management will generally not allow the previous month’s books to stay open for very long, instead locking them down for editing. It’s five days after the end of the month a supplier invoice comes in for the previous month’s services and that month is locked down…what do you do? Under soft close, just book it to the current period.
- How important to management and the owners is having full GAAP accrual-basis statements at interim? Can you live with knowing that revenues and expenses may be booked to the following month due to timing issues?
- What about third parties? Does the bank require monthly or quarterly GAAP financials?
- While a soft close process may work at interim, it is important to note that subsequent to year-end, you will still likely need to perform a hard close.
- If your company opts for a soft close the first eleven months of the year and then a hard close for the year-end, are there any pitfalls that would make it more difficult to reconcile the year-end numbers having not done that work in the interim? If this presents an issue, perhaps performing an option is a hard close at the end of each quarter and soft closing for the remaining eight months.
Contact Us with Your Questions
If you have questions or need help with determining which month-end close procedures suit your business best, contact our professionals at The Innovative CPA Group at 203-489-0612. Or contact us online.