Automating Period End Closing Processes
for Accounting Records

Whether for monthly or year end purposes, businesses require additional accounting procedures to “close the books” and prepare a set of financial statements. There are several benefits of automating these procedures which we explore in this article.

Why Do We Do This?
The process of reviewing transactions for accuracy (account reconciliation and adjustments, physical inventory, etc.), reviewing financial reports and verifying tax line tracking are all part of the complete process of closing the books. They are critical for verifying data accuracy, preparing financial reports for management and preparation for filing taxes.

All businesses are required by law to prepare a set of accurate Financial Statements as of a specified date based on either the cash basis or the modified accrual basis of accounting. This allows a business to get an accurate valuation of all Assets and Liabilities on the Balance Sheet as of the Year End date and to ensure all Revenues and Expenditures are recorded in the correct period on the Income Statement.

Closing your books protects prior period data by alerting users whenever they try to modify a record created before the closing date. If correction of a prior period transaction is required after the books are closed, you can always make adjustments later (prior period adjustment). Access to making these types of changes can be protected by passwords if necessary.

2 Major Elements To Monitor At Year End
The two main elements of the financial statements that must be accurately recorded are the revenues and expenses in the business. The accounting treatment of revenues and expenses will impact what is recorded on the Balance Sheet in Accounts Receivable and Accounts Payable.

Accounts Receivable:
Accounts Receivable reflects revenues earned but not received by the end of the year. Revenue has been earned if goods were sold and/or services provided either completely or substantially in full by the end of the fiscal year.

Accounts Payable:
Accounts Payable reflects expenses incurred but not paid for by the end of the fiscal year. Expenses have been incurred if the goods or services were received completely or substantially in full by the end of the fiscal year. Any expenses not in Accounts Payable should be listed on an Accrual worksheet at year end.

The transactions coding process is a key Accounts Payable function. Expenditures are to be recorded in a consistent manner across departments to ensure that account coding accurately reflects the nature of the transactions.

It should be policy to take and record all vendor discounts available through Accounts Payable invoicing. Discounts not taken should be recorded as discounts lost and cleared to the applicable expense account.

Departments are responsible for entering accounts payable invoices on a timely and accurate basis so that expenditures are recorded in the same period that they were incurred. Invoices not recorded need to be reviewed and if significant, accrued as liabilities to ensure the timely and accurate reporting of all liabilities in the financial statements.

Reconciliation of Inter Departmental Accounts
At least annually, a review of departmental receivables and payables should be conducted to see if there are any significant differences that need to be resolved prior to closing the accounting records for the current year. This can be a time-consuming exercise if done manually.

Year End Closing Process
The Year End Closing function in accounting software systems is used to close the books for the current accounting year and reopen them for the new accounting year. (The “accounting year” can be either a calendar year or a fiscal year.)

The closing process in most accounting systems will automatically complete the following steps:

1. Move the Current Year Opening Balances to the Prior Year Opening Balance for each balance sheet account.


2. Create new Opening Balances for the new year for all the balance sheet accounts.


3. Automatically calculate the current year's profit or loss and post it to the profit/loss account you select.


4. Move all Net Transactions for all General Ledger accounts from the Current Year column to the Prior Year column.


5. Reset the Current Year Net Transaction column for each General Ledger account to zero.


6. Save the current year's journals in an inactive status so they can’t be modified.


7. Open new, empty journals for the new year.

Manual Year End Closing Procedures That Can Be Automated
While accounting software has automated the basic year end procedures, these systems don’t address the need for automating other procedures “out-of-the-box” that can be time consuming and mundane. What follows is a list of year end procedures that should also be automated and what you can do to achieve this. These tasks include:

1. Running reports for the current year before closing the year. Generally speaking, most accounting systems have the capability to run these reports through a macro but it will require someone with programming skills to create the macro.


2. Testing the integrity of the data and making a complete backup. Good accounting systems have utilities such as Unattended Data Integrity Checkers that will automatically run a test on your accounting data to make sure there are no errors. These integrity checks can be scheduled to run at a specific time (usually over night when no one is on the system) to avoid interrupting daily business and accounting processes. Any errors found will be recorded in a log file for further review. This ensures that data errors are caught and corrected before the database is backed up and stored. If no errors are found, the system will automatically create a backup of the database. This saves a tremendous amount of time for Network and IT Administrators.


3. Balancing of Inter Entity Transactions. These are transactions which span multiple Departments, Companies or Branches within commercial businesses, multiple Funds in a not-for-profit organization and Partners within an Accounting Firm. Many accountants balance these transactions manually at the end of each month or quarter and also at Year End. It can take several hours if not a full day to complete the balancing of Due To and Due From accounts depending on the complexity of the relationships. A good accounting system will automatically balance these entries as they post to the General Ledger to ensure that all entities are always in balance and no manual intervention is required.

Remember, the ultimate goal of “closing the books” is to ensure that year-end reporting for all assets and liabilities will result in all of an organization’s revenues and expenses being reported to investors, management and the relevant tax authorities. This requires automated procedures to ensure consistent treatment, time savings and a reduction in errors which will ensure accuracy and completeness of financial information to be disclosed in the Financial Statements.