“Closing the books” is a term that will constantly circle around the accounting world regardless of digitalization. Yet, many people still get confused about this phrase. When speaking of “closing the books”, – “Books” refer to the business’ summary reports related to revenue, expense and income. ‘Closing the books’ means turning the income and expense value to zero and updating the net loss or profit on the balance sheets.
While many accounting software readily closes the books at the end of every year, it is more beneficial for every business if the books are closed monthly.
Why is “Closing Your Books” on a monthly basis essential?
In simple words, closing the books refers to the end-month or end-year accounting process. Though there is no limitation on the time period for closing the books, it is always advisable for every business to close the books every month for a smooth and streamlined accounting flow. Closing the books is essential for every business owner, as it helps in visualising a clear picture of your business’s finances. In layman’s terms, closing the books monthly will give a business owner a clear idea about their business’s net profit or loss, monthly income and expenses.
With this information, you can improve the financial status of your business by focusing on areas that require close attention. Along with this, closing the books monthly will aid in financial decision making and tax preparation by preventing you from taking unnecessary and costly risks.
Not sold on the idea of “closing the books” monthly? In a nutshell, the following are the pros of closing your books on a monthly basis:
By looking at the phrase and its definition, closing the books might seem easy, but it is a rather tedious and time-consuming task. However, despite being a complicated task, closing the books monthly brings positive results for your business. Closing your books monthly will indicate that your financial statements are in order, and it will prevent inconsistency in data inputs, resulting in several other benefits as mentioned herein:
Maintains accuracy in financial statements & books
Though it might be daunting to close the books monthly, having this process in order will provide you with easy maintenance of your financial statement and books. While closing the books, keep a check on your fixed asset register, it will give a better overview of your business’s finances. With monthly books closing, you will get a better chance to maintain accuracy in your reports and statements and keep your business running. Plus, it comes in handy at the time of the audit, keeping your statements and books accurate, and prepares you for future endeavours.
Simplifies Tax Filing
Closing the books monthly brings accuracy to financial records. An added benefit of keeping tabs on your business’s financial statements and books is that it simplifies the tax filing process. When all the receipts, expense files, and income values are accumulated and placed in order on a monthly basis, it saves you tons of time, effort and stress. In simple words, monthly closing helps you prepare for the tax season.
Provides Backup During Audits
As discussed, closing your book every month end gives accurate insights into the financial state of your company but also keeps the potential risks at bay. What is even more exciting is that the monthly closing of books remains at your back when tax and audit season eventually rolls out and you need all your transactions in one place.
Helps in Clear Visualisation of Your Business’ Financial Status
If you only close the books semi-yearly or quarterly, there is a big chance that your business’s financial status cannot be measured properly. Along with this, there are also chances of misplacing, and at times not even including the small payments. Though these payments might seem small, when measured on a yearly basis, they total up to a significant amount. Closing the books monthly prevents you from all this hassle. Measured efforts at the end of each month help you visualise the financial status of your business. Furthermore, you can easily put in place strategies to increase your profits.
Prevents Future Accounting Mistakes
When you close your books monthly, you accumulate all the financial data and obtain a clear picture of your monthly profit/ loss. You can keep tabs and calculate which expenses benefited you and which ones were worthless risks. Further, this data helps business owners and accountants prevent future mistakes. This orderly data will help you avoid the same mistakes, and strategise for better business plans.
Prepares You For The Future
Keeping track of your business’s financial status is pretty crucial. When you know about the expense, income, and profit/loss made, it is quite easy to strategise for the future. You get insights on which assets are beneficial to you and which ones are blunderous losses. Closing the books implies that all these insights are in order and collected under one roof. With these insights and data, you can easily plan and map out strategies for your future. And might also get an opportunity to future-proof them!
To complete the closing process immaculately & on time, it’s best to have the following elements ready: –
It is evident that closing your books monthly not only keeps all your financial statements and books in order but also saves you from last-minute pressure and stress! But, to close your books immaculately, it is recommended that you keep the following elements on hand:
Firstly, you need to collect all the month’s income, including even the most insignificant incomes. Align their receipts, document them and tally. It is these little and insignificant transactions that will act as a bullet-proof jacket against auditors and taxes. Record all your revenues, whether they are paid or unpaid. Include bank documents like cheques and statements.
Accounts receivable means all the unpaid income. When you are tallying your revenue and income, there might be some payments still pending. In layman’s language, there might be some customers or clients that used your products/ services and didn’t pay you. Tally the amount and send out reminders to them for payment updates. Also, keep a track of such payments.
Expense receipts and supplier invoices
Closing the books is not only about tallying your income. It also includes your expense tally. All the expenses made through the month, along with their receipts, should be there at the time of closing. With this, you do need to keep the supplier receipts on hand.
Bank accounts and statements
All the cheques and deposit receipts should be aligned and tallied. You need to align these bank records with their respective invoice or receipt.
Petty cash totals
There are two types of business owners, first – who keep a separate budget for petty cash transactions and second – the ones who don’t. Regardless of which one you are, you need to accurately tally these transactions and keep them on hand.
Lastly, keep all the inventory aligned with all the above-mentioned records, make sure that your calculations are accurate, recheck all the tallies and align them in order, keep the total inventory on hand, and you are good to go!