Month-end close process for a small business: checklist and a five-day calendar

What the close is for

A close turns a month of transactions into numbers you can rely on. After it, cash in the books matches the bank, what customers owe and what you owe are accurate, and the month is protected from later edits. Lenders, tax preparers and your own decisions all depend on those numbers.

The order matters. Reconciling before every transaction is recorded means doing it twice. Reviewing reports before reconciling means reviewing numbers that may still change. Locking is last, after everything else is final.

Step 1: gather statements for every account

Start with a fixed list of accounts so nothing is missed. For a typical small business, it covers business checking, savings, each credit card, any loan or line of credit, and every payment processor or online payment service that holds money before paying it to the bank.

Download statements, not just transaction exports. A statement has the opening and closing balance you reconcile to. Card statements often close on a date other than the last day of the month, so note each statement’s period. You still close the month on the calendar month end, and the card reconciliation will carry charges after the card’s closing date to the next cycle.

If a bank only provides PDF statements and you need rows for your software or a spreadsheet, convert the PDF first. Fulla Ledger turns statement PDFs into rows you review against the source page and approve before exporting them as CSV, XLSX or OFX for QuickBooks Online or Xero.

Steps 2 and 3: record, categorize and reconcile

Bring every transaction into the books, then reconcile account by account. QuickBooks Online’s own instructions for locking your books list the same preparation: review all accounts, enter outstanding invoices, expenses and payments, and reconcile your accounts up to the lock date.

For each bank and card account, the reconciliation should finish with a difference of zero, a list of outstanding checks and deposits in transit, and any bank fees or interest recorded. Keep the reconciliation report for each account. If an account will not reconcile, do not move on and post a plug entry. Find the cause, because every later step depends on cash being right.

Steps 4 and 5: receivables, payables and adjustments

Run the aging reports for receivables and payables and read them line by line. Customer payments that were deposited but not applied to an invoice show up as both an open invoice and an unapplied credit. Bills paid from the bank but never entered show up as an expense with no bill. Fix these now, while the month is fresh.

Small businesses that keep cash-basis books can skip most accrual entries. If you keep accrual books, the usual monthly adjustments are:

• Accrued expenses: services you used this month but have not been billed for, such as utilities or a contractor’s hours.
• Prepaid expenses: one month of an annual insurance premium or software subscription paid in advance, moved from prepaid to expense.
• Payroll: wages, employer payroll taxes and benefits for the month, matched to the payroll provider’s reports. Wages earned in the month but paid in the next month are an accrual.
• Depreciation: the month’s depreciation on equipment, vehicles and other fixed assets, from a fixed asset schedule.
• Deferred revenue: payments received in advance for work you have not done yet.

Step 6: review the reports

Read the profit and loss and the balance sheet together. These checks catch most problems:

• The bank and card balances on the balance sheet equal the reconciled balances.
• Uncategorized income, uncategorized expense, suspense and ask my accountant accounts are empty or explained.
• No asset or liability has the wrong sign, such as a negative bank balance when the account was never overdrawn.
• Revenue and major expenses are in line with last month and the same month last year, or the difference has a reason you can write down.
• Loan balances match the lender’s statement, and the interest portion of each payment was booked to interest expense.
• Sales tax payable matches the sales tax report for the period.

Step 7: lock the period

Locking stops accidental changes to a month you have already reconciled and reported. Both major cloud accounting products have a setting for it.

In QuickBooks Online, Intuit’s help article describes going to Settings, then Account and settings, then the Advanced tab. In the Accounting section select Edit, turn on Close the books and enter a closing date. You then choose whether users see only a warning, or a warning plus a password prompt, before they can change a transaction dated on or before that date.

In Xero, the help article on lock dates says you need the administrator user role. In the Accounting menu, select Accounting settings, then Financial settings, and enter the date under Lock Dates. You can lock for all user roles, or for all roles except administrators. After the lock date is set, users cannot add or edit transactions dated on or before it, although they can still create draft invoices, bills and expense claims and save draft manual journals. An administrator can remove the lock date temporarily to allow a correction.

If something has to change after the lock, record the correction in the current open month where possible, rather than unlocking a closed month.

Document the close

Keep one folder per month. It should let someone else see what was done without asking you:

• The statement for every account, with its period and closing balance.
• The reconciliation report for every bank, card and loan account.
• The receivables and payables aging reports as of month end.
• Supporting schedules for accruals, prepaids, payroll and depreciation.
• The profit and loss and balance sheet as reviewed, with a short note on anything unusual.
• The closing date or lock date you set, and who set it.