Why do businesses utilize month-end closing processes?

Month-end closing is an accounting procedure performed at the end of each month to close out the accounting period. It adjusts for accrual accounts such as wages payable, interest payable, depreciation, etc. These items are recognized in the current period but will be paid in a future period.

Month-end closing tracks the sales and expenses for that month which, over time, provides a report card on how the business is trending. Are some months or seasons more profitable than others?

Some of the impacted by month-end processes are accounts receivable, accounts payable, depreciation of fixed assets, reconciliation of inventory discrepancies, transferring work-in-process materials to finished goods, billing processes, posting of cash receipts, and payroll (paid and accrued).

The highly important accounting procedure is undertaken at the end of the month to close out the current posting period. It is part of a company’s closing operations.

Since a company’s business activities are ongoing, accountants might state “we need to get a proper “cut-off” between the end-of-the-month transactions and those that belong in the following month.

If a company sells goods and has inventories, its monthly close will be more challenging. The company must be certain that the costs of the goods purchased are recorded in the same month as the goods are added to the inventories.

What are other benefits of having a clear month-end statement?

Reviewing the financial statements before they are distributed is also an important step in the monthly close. This could mean comparing the amounts and percentages on the current financial statements to those of earlier months. For example, if the current income statement shows the cost of goods sold as 86% instead of the normal 81%, the current month’s amounts should be investigated before releasing the financial statements.