Get To Know More About Financial Close
What is the Financial Close Process
Financial close clubs all the accounting and financial processes that lead up to and include the closing of books on the preceding month, quarter, or year. Under the financial close come eight steps, which are the identification of transactions, recording them in journals, posting them on the general ledger, preparing an unadjusted trial balance, reconciling debits and credit, creating adjusting journal entries, running an adjusted trial balance and financial statements, and closing the books to reset income statement accounts to zero and lock in balance sheet accounts as of the period’s end.
In the end, you will get financial statements that your clients will use for business analysis, comparisons with previous budgets, and KPI generation. External stakeholders such as investors, lenders, and regulatory agencies like HMRC and Companies House demand these financial statements for investment and regulatory purposes.
Difference between Financial Close and Closing the Books
You may have noticed multiple accountants using financial close and closing the terms of the book interchangeably. However, they are quite distinct.
It is a broad term that covers all of a month’s accounting processes but is not limited to closing the books. In short, financial close covers the whole accounting cycle, from the generation of statements to closing the books.
On the other hand, closing the books is just the final step in the financial close. The main objective of closing the books is to reset temporary accounts to zero and lock in the prior period’s balance. Temporary accounts, also referred to as nominal accounts, are those found on the income statement to accumulate the period’s revenue, expenses, gains, and losses.
Steps to Financial Close
As mentioned above, there are 8 steps to complete the financial close process, which must be followed in ascending order.
- Identification of transactions
- Recording it in journals
- Posting it on the general ledger
- Preparing an unadjusted trial balance
- Reconciling debits and credit
- Creating and adjusting journal entries
- Running an adjusted trial balance and financial statements
- Closing the books to reset income statement accounts to zero and lock in balance sheet accounts as of the period’s end
Challenges Around Financial Close
We agree that the process is time-consuming and complex for you and your competitors. You must have faced unnecessary hurdles while doing it. By avoiding these hurdles, you successfully complete the cycle.
Lack of Uniformity
Some accounting practices ignore uniformity. When performing this process, they simply rely on the accountant’s memory instead of following standard operating procedures. However, this increases the chance of missing crucial information.
For example, some accountants may report expense claims in their own way, which creates a lot of confusion. Lack of uniformity creates possibilities of errors, and it also adds to your time and effort.
Lack of Automation
The more you insist on doing this process manually, the longer it will take, increasing the chances of making errors. Therefore, by adopting accounting software, you can reduce the manual workload to a greater extent.
Lack of Complete Data
To do a financial close, you will require all the data ready because incomplete data will only lead to confusion. For example, missing invoices and expense reports will lead to incorrect account balances. To rectify this, your accountants will have to spend time on it, leading to loss of time and productivity.
Process in Rushed
If the financial close is done speedily, you can start by preparing financial statements and issuing them to stakeholders. But that does not mean you must skip the process. These statements are the output, and they have to be accurate. Based on them, your clients can apply for loans or make informed decisions. Any error in them will lead to a loss of reputation for your accounting practice.
Lack of Integration
When the required data is stored in a completely different system, you will have no option but to manually collect and compile it. This only increases the time spent and errors in the process.
Make the Financial Close Process Easier with Accounting Software
Integrating accounting financial software can help overcome the above-mentioned challenges in the process. It can improve your process and save time, which can be devoted to other important tasks such as financial analysis and forecasting.
There are some other benefits, too, which are as follows:
Promote Automation
It achieves that by reducing or eliminating manual work, such as transferring journal entries into the general ledger, thus reducing the chances of error.
Streamlines Reconciliation Process
This is achieved by collecting data from various sources, documents, and systems. Accounting software can also detect any discrepancies quickly so that remedial measures can be taken.
Integrate Data and Keep All Information Consistent
Accounting software will ensure that accountants get all the information available in real-time, quickening the process.
Real-Time Dashboards
All accounting software has dashboards allowing you to check the numbers whenever and wherever you want.
Conclusion
To conclude, we would like to reemphasise that is very important for your clients. All the reports are generated based on the financial close, which will give them a picture of their health and help them take corrective steps if required. However, we understand that financial close is complicated, and a vast amount of data can overwhelm even the most prominent accounting practice. Therefore, you can outsource some of your excess workload to an outsourcing accounting service provider such as Corient Business Solutions.
We are an accounting outsourcing service provider that offers financial close services through our professional and experienced accountants. For more clarity on our services, please do contact us. We will set up an online meeting and explain to you in detail at your convenience.