In this post, I will describe the month-end closing process at one of the companies that I used to work for. Throughout the time that I was there, the company was going through an accounting system transition from PDS to Microsoft Dynamics Great Plains (GP). Thus, it had been using both accounting systems at the same time until the transition was completed. I also wanted to note that I worked for General Ledger (GL) team. Hence, the process described here is from my perspective as an accountant.
Prior to the start of the month-end close, the GL Accounting Manager holds a meeting with the members of the accounting department, as well as members of other various departments that have responsibilities related to the close, to inform the closing dates for each process with a closing calendar. The closing calendar notes critical deadlines, including:
- Close of Accounts Receivable Sub-ledger (Business Day 2)
- Close of Accounts Payable Sub-ledger (Business Day 3)
- Close of Inventory Sub-ledger (Business Day 3)
Close of Accounts Receivable Sub-ledger During Month End Closing
The closing of the Account Receivable (AR) sub-ledgers (PDS and GP) is typically the first step in the closing process. Accounts Receivable is scheduled to close on approximately the second or third working day of the subsequent month. Once the sub-ledgers are closed, invoices cannot be raised for the closed period.
Before closing the sub-ledger, AR Manager compares the balances between the AR Aging and the Trial Balance. Differences noted are usually sales transactions that are approved in the system for the subsequent month, but were recorded in the preliminary AR Aging report for the month that is being closed. As long as sales transactions are recorded in the correct accounting system, there is no need to change anything in the system. After agreeing on the total receivable balances per the sub-ledger reports to the general ledger, the AR manager closes the AR sub-ledgers in both PDS and GP systems.
Following the close of AR, the AR Manager then generates the combined AR Aging report and creates the Problem Accounts Report for accounts that could have potential collection problems. The report contains the following information: account number and name, previous month-end balance, current total, credit limit, provision percentage, and comments. The Comments section is updated by the AR Manager and explains the current status of the outstanding aged balances. Explanations are required for accounts that are 30 days past due and/or 16 days past due with a balance of over $500,000. The AR Manager sends the reports to CFO and Assistant Finance Manager for their review. After the report is approved by the CFO, AR Manager distributes the report via email to all distribution managers. A meeting is held between finance and distribution within the first ten working days of the month to discuss the report. Based on the Problem Accounts Report that AR Manager provides, accountants manually book a journal entry to record estimated bad debt expense and allowance for bad debt. This entry is included in the monthly journal entry checklist maintained by the Accounting Team.
The AR Manager also needs to run the Accounts with Credit Balances Report after AR is closed. The report reflects the customer balances for customers with credit balances at month-end by the aged period, such as current, past 30 days, over 60 days, etc. The report is provided to Accounting via email at month-end for a monthly reclassification entry. The purpose of the entry is to recognize customer credit balances as a current liability as they are money that is owed back to the customer. The total ending balance of the report is credited from the AR general ledger account to the Customer Cash general ledger account (liability).
Close of Accounts Payable Sub-ledger During Month End Closing
The closing of the Accounts Payable (AP) sub-ledgers (PDS and GP) is the second step in the closing process and is typically scheduled to occur on the third or fourth day of the subsequent month, depending on invoice volumes. After AP is closed, vendor invoices cannot be recorded for the closed period. Any invoices that come subsequent to the close of AP, but relate to services rendered in the closed month, will need to be accrued for by the General Ledger team through a series of accrual journal entries.
The AP Supervisor is in charge of closing the sub-ledgers in both the PDS and GP systems. Prior to closing AP, the AP Supervisor ensures that all vendor invoices pertaining to the period being closed have been recorded in the AP module and that all cash applications have been processed in both accounting systems. Selling, General and Administrative (SG&A) expenses, and employee expense reimbursement reports should be submitted in time to the AP department so that they can be processed in the correct period.
Close of Inventory Sub-ledger During Month End Closing
The close of the Inventory sub-ledger is the third step in the closing process and should be done in conjunction with the closing of Accounts Payable. The inventory team should ensure all sales are entered prior to the month-end. At month-end, Inventory Analysts are responsible for reconciling the inventory per the sub-ledger (Product Transaction Report) and the general ledger. Any differences noted on the reconciliation are researched, resolved, and documented within a journal entry to adjust for the differences. The journal entry and supporting documentation are provided to the Controller for review and approval. Differences are typically attributed to the wrong coding of inventory in the general ledger, or variances noted between “on hand” and “available” quantities in GP. For the former, reclassification entries within the respective inventory accounts are recorded.
Preparation of Journal Entries
A standard journal entry checklist is utilized by Accounting to ensure all recurring manual journal entries required during the financial close are posted. The checklist includes information such as journal entry reference, description, frequency, system (GP or PDS), timing (i.e., dependencies: before/after month-end, after AR close, after AP close, etc.), due date, and mode (standard/reversal).
Journal entries are organized by the department responsible for the preparation and approval of the entries. Entries are referenced by seven different categories: SG&A, Sales, Tax, Inventory, Risk, Compliance, and Final. Accounting is responsible for preparing SG&A, Sales, and Final entries. Preparation and approval of Tax, Inventory, Risk, and Compliance entries are the responsibility of the corresponding departments. However, members of the Accounting team are the only personnel who are permitted to post to the general ledger and thus are responsible for posting all entries.
All manual accounting entries require an independent review, and both preparers’ and reviewers’ names are entered on the journal entries checklist. Entries are approved manually outside the system via email. The entries are due between the last day of the month or the first day of the close and the eighth business day of the close. After the journal entries are approved, the General Ledger team is responsible for uploading the journal entries to the systems. Journal entries should be booked at the earliest possible date in accordance with their dependencies if any. Journal entries are assigned a specific due date based on the close schedule.
Consolidation and Financial Reporting
After all the manual journal entries are posted for the month, Accounting will post two final journal entries to transfer the PDS trial balance to Great Plains. After consolidating the data, the GL Accounting Manager will perform a P&L to GP Mapping as a final check for accuracy. An adjusting entry will be made if necessary, to ensure that the control accounts that should have a zero balance are zero.
In addition, during the consolidating process, Accounting is required to prepare elimination entries to remove inter-company transactions between my former company and its wholly-owned subsidiary, which is a logistics trucking company. The subsidiary’s financials are consolidated into my old company’s financial statements.
After all consolidation journal entries are booked, the Accounting Manager will prepare financial reports by downloading the financial data from the Great Plains system and creating an Excel worksheet. Several versions of the financials will be drafted before the final numbers are confirmed by the Controller, Accounting Manager, Risk Manager, and CFO. Once the month-end financial numbers are approved, the Accounting Manager runs the final trial balance and save the final version of the financials to a month-end folder on the company shared drive.