What is the Month End Close? Steps and Best Practices

Automate 50% of your closed tasks with a familiar Excel-like interface with a twist of automation. As previously mentioned, there are typically general guidelines regarding what information you’ll need to use and how it should be managed. However, the individual business has a lot of nuance regarding the actual execution of the reporting efforts. As such, we recommend that you draft an internal plan outlining specific actions and then repeat those steps every month without variance.

• Closing entries are journal entries used to empty temporary accounts at the end of a reporting period and transfer their balances into permanent accounts.
• Now for this step, we need to get the balance of the Income Summary account.
• The sooner you spot discrepancies, the easier it is to correct them before the closing period.
• With automation, you’ll be able to cut down on errors in your data and complete calculations and reconciliations in seconds.
• A well-structured timeline with clear milestones is essential for managing the month-end closing process.
• There may be a scenario where a business’s revenues are greater than its expenses.

That’s exactly what we will be answering in this guide –  along with the basics of properly creating closing entries for your small business accounting. The process of using of the income summary account is shown in the diagram below. Temporary accounts will have a zero balance after closing entries are made. These best practices, combined with the right technology and team alignment, can transform your month-end close from a stressful scramble into a smooth, predictable process. The result is not just a faster close, but also a more accurate one that gives your business timely insights for better decision-making.

Closing Entries Accounting with Automation

When multiple people are involved in the month-end close—whether it’s your internal team or your client’s staff—there’s a good chance they’ll miscommunicate or misunderstand each other. Maybe the client forgets to inform you about a large purchase, your team isn’t clear on who’s responsible for certain tasks, or there’s confusion about deadlines. Here are some of the most common issues accountants and bookkeepers face when closing the books at the end of the month.

Example of closing entries

This is because the financial close process requires meticulous attention to detail. However, what poses significant challenges for accounting teams are common errors that further makes the process cumbersome. Companies generally journalize and post-closing entries only at the end of the annual accounting period, in contrast to the steps in the cycle.

He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO understanding your small businesss current assets or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.

Best Basic Tools of Accounting for 2025

However, some corporations use a temporary clearing account for dividends declared (let’s use “Dividends”). They’d record declarations by debiting Dividends Payable and crediting Dividends. If this is the case, then this temporary dividends account needs to be closed at the end of the period to the capital account, Retained Earnings. In a sole proprietorship, a drawing account is maintained to record all withdrawals made by the owner. All drawing accounts are closed to the respective capital accounts at the end of the accounting period.

The Income Summary Account

Something noteworthy here is that the above closing entry can be passed even without using the income summary account. I.e., moving the balances directly from revenue and expense account to the retained earnings account. But using the income summary account was used to give a clear view of the company’s performance when there was only manual accounting. Usually, where the accounting is automated or done using software, this intermediate income summary account is not used, and the balances are directly business license transferred to the retained earnings account.

Accelerating your month-end closing process doesn’t mean sacrificing accuracy. By implementing these best practices, your finance team can significantly reduce close times while maintaining—and often improving—the quality of financial reporting. The accounting month-end close process often involves inputting data from multiple sources into your financial system. Manual entry introduces the risk of transposition errors, missed entries, or incorrect classifications that can significantly impact financial statement accuracy. Having a documented month-end close process creates a clear, standardized guide that everyone on your team can follow. It ensures that tasks are completed consistently and reduces the risk of missed steps, especially when onboarding new team members or delegating work.

• In this case, we can see the snapshot of the opening trial balance below.
• Closing all temporary accounts to the retained earnings account is faster than using the income summary account method because it saves a step.
• The accounting cycle involves several steps to manage and report financial data, starting with recording transactions and ending with preparing financial statements.
• The month-end close process is the steps accountants and bookkeepers follow to review, reconcile, and finalize a company’s financial records at the end of each month.
• Calculate and post depreciation entries based on your company’s depreciation policy.
• The goal is to ensure that all transactions are accurately recorded, that accounts are balanced, and that financial reports reflect the company’s true financial position.

Close all dividend or withdrawal accounts

Other than the retained earnings account, closing journal entries do not affect permanent accounts. Optimizing the month-end close process is crucial for businesses to improve efficiency, reduce errors, and enhance financial reporting. One way to optimize the process is to implement automation tools, such as accounting software, to streamline tasks and reduce manual errors. Automation can handle repetitive tasks like data collection, account reconciliations, and report generation, freeing up the accounting team to focus on more strategic activities.

Within each workflow, you can assign specific tasks to team members, set due dates, and monitor progress in real time. Communication breakdowns can happen when multiple team members work on different tasks, which delays the process. So use collaboration tools like Financial Cents to keep everyone on the same page by providing a central place to share updates, ask questions, and flag issues.

Review Processes Regularly To Identify Areas for Improvement

This trial balance gives the opening balances for the next accounting period, and contains only balance sheet accounts including the new balance on the retained earnings account as shown below. Closing entries are performed after adjusting entries in the accounting cycle. Adjusting entries ensures that revenues and expenses are appropriately recognized in the correct accounting period. Once adjusting entries have been made, closing entries are used to reset temporary accounts. Another approach is to standardize processes and procedures, ensuring that all financial transactions are handled consistently and accurately. Standardization reduces confusion and ensures that everyone follows the same steps each month.

Most organizations take around 5-10 working days to complete the month-end close, and most businesses struggle to  reduce this timeframe. HighRadius’ financial close software  helps businesses accelerate their month-end close, making it faster, smoother, and error-free. Our AI-powered transaction matching software and anomaly management systems gives access to real-time data and proactively identifies errors.

We recommend that you routinely bring together any stakeholders or participants and have them discuss what is and isn’t working. By crowdsourcing their experiences, you can often identify process dependencies or cross-departmental inefficiencies that would otherwise go unnoticed. The following example of closing entries will assist you in quickly comprehending closing entries. Let’s also assume that ABC Ltd incurred expenses of ₹ 45,00,000 in the raw material purchase, machinery purchase, salary paid to its employees, etc., over the accounting year 2018.

Temporary accounts are income statement accounts that are used to track accounting activity during an accounting period. For example, the revenues account records the amount of revenues earned during an accounting period—not during the life of the company. They must also comply with financial regulations and standards, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). The accounting department’s attention to detail and expertise in financial reporting are essential to the success of the month-end close process. Their diligent work ensures periodic inventory system: methods and calculations that the financial statements are accurate, complete, and provide valuable insights into the company’s financial performance. This includes bank accounts, credit cards, loans, and intercompany accounts.

Well, temporary accounts only track financial activities for specific timeframes. Closing entries, on the other hand, are entries that close temporary ledger accounts and transfer their balances to permanent accounts. Let’s investigate an example of how closing journal entries impact a trial balance. Imagine you own a bakery business, and you’re starting a new financial year on March 1st. Closing all temporary accounts to the income summary account leaves an audit trail for accountants to follow. The total of the income summary account after the all temporary accounts have been close should be equal to the net income for the period.

One client’s reports might be accurate and timely, while another has errors or delays. This can lead to mistakes in reconciliations and journal entries, increased stress for you and your team, and delayed client financial reports. It’s frustrating when the client submits incomplete records, as you must spend extra time tracking down the missing information. Otherwise, you’ll find reconciling the accounts and producing reliable financial statements difficult. This can lead to compliance issues, incorrect tax calculations, and poor financial decision-making for your client. Once all the transactions are reviewed and recorded, the next step is to post all the closing entries in the general ledger for the month.

By consistently refining your processes, you can make each month-end close faster, more accurate, and less stressful. Here are a few tips to help your close process run efficiently and smoothly. When this happens, it can lead to duplicated work, missed work, overlooked transactions, and unnecessary back-and-forths. After generating all the financial reports, you need to analyze and interpret to be better prepared to share insights, share feedback and present findings to stakeholders. There is always room for improvement, and as you conduct these closings 12 times each year, you’ll have plenty of opportunities to flag duplicated efforts or common delays.