Month-end close

What it means

The month-end close is the regular closing of the books for the month. It involves posting all documents, reconciling bank accounts and sub-ledgers, accruals and deferrals of costs and revenue, calculating depreciation and preparing monthly reports for management.

The law does not require a monthly close as such; only the annual closing of the books is mandatory. A regular monthly close, however, allows decisions to be based on current figures, catches errors early and makes the year-end much easier, since documents for the whole year do not have to be tracked down at once.

For VAT payers with a monthly tax period, the month-end close is a natural part of the job, because the VAT return and control statement are due by the 25th of the following month and must be based on complete, checked data.

How it works in practice

A typical sequence is posting all purchase and sales invoices, cash documents and bank statements, checking that account balances agree with the statements, and reconciling receivables and payables with each counterparty.

Next come accruals and deferrals, for example of rent or insurance paid in advance, and recording uninvoiced supplies where a service has been provided but the invoice has not yet arrived. Payroll, contributions and monthly depreciation are posted.

The output is reports for management accounting: profit and loss by cost centre or job, comparison with budget and a cash flow overview. A task checklist with deadlines and owners helps ensure the close is done the same way and on time every month.

What to watch out for

The most common obstacle is late delivery of documents. If a client or employees send invoices and receipts a month late, the close cannot be complete. Agreeing a firm deadline for documents, for example by the fifth of the month, helps.

Speed must not come at the expense of accuracy. If estimates, such as for uninvoiced supplies, are corrected irregularly, monthly results swing and management makes decisions on wrong numbers. Estimates should be compared with actual invoices once received and the approach adjusted.