What a closed month means
A month is closed when its figures are final: nobody can post into it, and the reports you send to the owner or the bank will read the same next month. Until then, every late invoice or forgotten receipt changes the profit after people have seen it.
A good close follows the same order every month, on the same working days, with one person owning each step. The order matters because each step relies on the one before it.
- Working day 1: cut-off, and the last van and till closes.
- Working day 2: cash and bank reconciliations.
- Working day 3: receivables, payables and goods received not invoiced.
- Working day 4: stock, cost of goods sold and the VAT review.
- Working day 5: accruals, a review of the statements, then the close.
Get the cut-off right
Cut-off means every event lands in the month it happened. Goods delivered on the 31st are a sale of that month, even if the invoice prints on the 1st. Goods received on the 31st are stock of that month, even if the vendor’s bill arrives next week.
For a distributor the risky edges are vans and late deliveries. Every van day up to the last day of the month must be closed, its cash handed over and its invoices synced before the month can be trusted.
- Every delivery made by month end is invoiced in the month
- Every receipt by month end is posted, billed or not
- Every van day and till shift is closed and approved
- Draft documents are posted or deleted, not left open
TipSet a time on the last day after which new documents are dated in the next month, and tell the reps and the warehouse in advance.
Reconcile cash and bank
Start with the money, because every other balance depends on payments being recorded. Match each bank account in the books to the bank statement at month end, and explain every difference: deposits in transit, cheques not yet cleared, bank charges not yet booked.
Cash collected by vans deserves its own line. Collections handed over on the last day but banked on the first should show as cash in transit, not vanish between the two months.
Tie receivables and payables to their records
The receivables account in the ledger should equal the open customer invoices, less unapplied payments and credits. The same goes for payables and open vendor bills. When they differ, the cause is usually a manual journal posted straight to the control account, or a document that never reached the ledger.
Then read the aging. Old invoices that will not be paid need a decision this month, not a note for later, and unapplied payments should be set against the invoices they pay.
TipDo not post manual journals to receivables, payables or inventory; correct them through the documents, so the ledger and its records cannot drift apart.
Stock, cost and goods received not invoiced
Compare the inventory account with the stock valuation as at the last day. When every movement posts its own cost, the two should agree exactly. Post any count adjustments found during the month before you compare.
Goods received not invoiced is the liability for stock you received but have not yet been billed for. Its balance should equal the value of receipts still waiting for a bill. An old item on that list is either a bill you lost or a receipt that was wrong.
VAT, accruals and a hard look at the statements
Review the VAT accounts against the month’s invoices and bills before any return is prepared. Check that every sales invoice carried the right tax code, and that input VAT is claimed only on bills you actually hold.
Accrue costs that belong to the month but are not yet billed, such as rent, utilities or freight, and post depreciation if you keep fixed assets. Then read the income statement against last month and the same month last year. A margin that jumped or fell sharply usually points to a cut-off or costing error, not to a good or bad month.
TipWrite a one-line explanation for every large movement in the income statement before you close; if you cannot explain it, do not close yet.
Close, then lock
Close in two stages. A soft close stops new postings while you review, and still lets you reopen if you find a mistake. The final close comes when the review is done. Lock the period for good only after the figures are signed off, for example after the audit at year end.
Close periods in order, and close the year only after its last month is final, so the year’s profit moves to retained earnings once.
Checklist: Month-end close checklist
- Close and approve every van day and till shift
- Post or delete every draft document
- Reconcile every bank account to its statement
- Tie receivables and payables to their aging
- Compare inventory with the stock valuation
- Clear old items from goods received not invoiced
- Review VAT accounts against the month’s documents
- Accrue costs that are not yet billed
- Explain every large movement in the income statement
- Soft close, review, then close the period