- Closing entries ensure the accuracy of financial books, but they can be challenging for several reasons.
- Common obstacles include inaccurate record-keeping, unclear procedures, poor communication, limited resources, and resistance to change.
- Adopting financial close management software can increase accuracy and provide valuable insights into financials.
- Establishing a clear closing schedule, automating tasks, and tracking progress can significantly improve the closing process.
- Financial closing can be simplified with the right tools and processes, ensuring timely and accurate book closure.
For business owners, closing their books at the end of each financial period can be a dreaded and stressful experience. It can be a confusing and overwhelming process that requires meticulous attention to detail and a good understanding of accounting principles. Unfortunately, many businesses struggle to complete their financial closings promptly and accurately, negatively impacting their company’s success.
Closing Entries
The closing entry is the last step in the accounting cycle and involves transferring all temporary account balances to a retained earnings account. This ensures that the beginning balance of all accounts is reset for the next accounting period.
The closing process can vary depending on the business’s circumstances, but there are typically five steps:
- All income and expense accounts must be closed and their balances put into an appropriate equity account.
- All liabilities and assets need to be adjusted for any activity that occurred during the period
- All balance sheet accounts (assets, liabilities, and equity) should have net zero balances.
- The retained earnings account must then be updated with the period’s net income or loss amount.
- The closing entry will then be recorded to reflect any changes in the retained earnings account.
These steps must be completed before any financial statements can be prepared and are essential for the accuracy and completeness of the company’s books. Failure to make entries correctly can lead to errors, omissions, and misstatements that may cause significant financial losses and tax implications. However, perfectly doing this can be quite challenging for businesses for these reasons:
1. Incomplete or Inaccurate Record-Keeping
A primary reason why many businesses struggle with financial closings is incomplete or inaccurate record-keeping throughout the year. Often, business owners rely on a mix of spreadsheet software and traditional bookkeeping, which can lead to missed expenses and questionable data.
When it comes time to close their books, reconciling discrepancies or accurately calculating revenue and expenses can be hard. To ensure your record-keeping is accurate, consider using accounting software or hiring an experienced accountant to manage your books regularly. Additionally, it’s good to use the right software for your business. A financial close management software can look into the whole process and track where all your numbers went. It can also provide you with greater accuracy and insights into your financials.
2. Lack of Adequate Processes
Businesses often fail to establish clear and concise accounting processes that outline the necessary steps for closing their books. Without a clear roadmap, it can be challenging for employees to know what is expected of them, leading to delayed or incomplete financial closings. Establishing transparent procedures for your financial closing process and communicating these to all employees is important. This ensures everyone knows what to expect and what to provide to complete the closing process.
3. Poor Communication
Another critical factor that hinders financial closings is the lack of effective communication between employees and departments. This leads to disorganization and confusion, which ultimately prolongs the closing process. Encourage transparent and frequent communication between finance personnel and other departments within your company. Regular meetings and scheduled updates can help ensure everyone is on the same page and prepared for the closing process.
4. Limited Resources
Many small businesses struggle with limited resources, including finances, personnel, and time. This can impede their ability to manage financial closings efficiently. Consider hiring additional employees, outsourcing accounting and bookkeeping tasks, or investing in accounting software to streamline the process. Doing so can help your business close out your books accurately and within a reasonable time.
5. Inability to Adapt to Changes
As with any business process, change is inevitable. Companies that struggle with financial closings are those that are resistant to change. Staying current with accounting principles and technology is essential as they evolve rapidly. Consider investing in employee training or updating your accounting software regularly to stay at the forefront of changes.
Ways to Efficiently Close Books
Thankfully, there are some tips you can follow to close books efficiently. Here are three tips:
Establish a Schedule
It’s essential to have a set schedule for closing your books. Determine the specific tasks you must complete and assign them with due dates. This will help keep everyone on track and ensure all tasks are completed within the timeframe.
Automate Task
Accounting software can help automate some of the more tedious tasks associated with closing books. This will save employees time and ensure accuracy.
Track Progress
After creating a schedule, monitoring progress and adjusting where necessary is essential. Regularly track each step in the process to ensure tasks are completed on time and accurately.
These tips can help businesses close their books more efficiently and accurately. With the right processes in place, businesses can ensure they are prepared for financial closings and won’t be impacted by any mistakes or delays.
Closing your books on time is essential for any business to remain successful. With the right tools, processes, and communication, businesses can close their books quickly and more accurately. With the help of accounting software and experienced professionals, the financial closing process can be drastically simplified. These steps can help ensure your books are closed promptly and accurately each period.
