Month-End Closing Procedures

Month-End Closing Procedures

Month-end closing can be challenging for many businesses. A balance needs to be found between dedicating too many resources and not quite enough. There are two basic fundamental approaches to closing the books for a period: a hard close or a soft close. It is essential to understand each strategy to determine what’s best for your business. Below is a breakdown of these two approaches and some key considerations when choosing which strategy to implement.

The Hard Close Approach:

When a business completes a hard close at the end of a month, they treat that month almost as a “year end.” The accounting staff will reconcile the balance sheet accounts (receivables, payables, other accruals, deferred/unearned revenue, etc.) and hone in on the corresponding revenue/expense cutoff as it applies to the income statement. Whatever the duration of the period-end closing process, the previous period’s books stay open in the accounting system so the appropriate entries can retroactively be made to true-up the end of that period. Companies may benefit from doing this every month as they ultimately would produce generally accepted accounting principles (“GAAP”) full-accrual basis financial statements for every month. Management is then able to use this information to make critical business decisions. The drawback is this is a time-consuming process, and there are many resources devoted to executing it.

The Soft Close Approach:

In contrast, a company can utilize the soft close process. The soft close process does not include a significant portion of the month-end close reconciliation process. Under a soft close, management will generally not allow the previous month’s books to stay open for very long, instead the accounting software is locked down not allowing editing. Under a soft close, after the last month’s books have been closed out, the accounting staff will book any new supplier invoices for expenses attributed to previous month in the current period.

Key Considerations:

Consideration should be given to the following when deciding between a hard or soft close:

  • How important is it to have full GAAP accrual-basis statements in the interim?
  • Is it an issue for the company if revenues and expenses are recorded in 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 in the interim, it is important to note that you will still likely need to perform a hard close subsequent to year-end. If your company opts for a soft close for the first eleven months of the year and then a hard close for the year-end, it is essential to consider any pitfalls that could make it more difficult to reconcile the year-end numbers, having not done that work in the interim. If this presents an issue, a viable option is to perform 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 assistance 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 via our contact form.

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2021-10-20T17:47:31+00:00October 20th, 2021|Business, Financial Reporting|

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