How to Sequence your Month Close

Hey guys, in this video we're discussing the sequence of your financial close. So as you know, as controllers, we close the books every financial period. Typically that is a month. So we close the books each month and then each quarter and each year. But the steps are typically the same every single month with some added steps at the end of the quarter or at the end of the year. So today we're talking about the sequence of the close because you have to do it in a specific sequence going this way here. Because, for example, you wouldn't be able to reconcile your cash, your bank statements, before you post your cash transactions. You wouldn't be able to do your accrual adjustments before you record your actual invoicing and vendor bills. You wouldn't be able to reconcile the balance sheet before your accrual adjustments. So you get the picture here that there is a certain sequence that you have to follow. So let's look at this sequence here and some examples that will help us along the way. I'm excited about this video, so let's dive right in. Hey guys, this is Bill Hanna, your favorite financial controller with about 20 years of experience in controllership and FP&A. So let's talk about step number 1 in our sequence to close the books. Post. What do we mean by post? That's posting the cash transactions. So typically you have your bank connected to your financial system, whether it's QuickBooks or NetSuite or whatever ERP you're on. You connect your bank to the books and then you go and post these transactions as they come in, whether they are payment received or payment made to vendors. These are things you should be doing throughout the period and making sure you're posting these. So let's go ahead and jump on my computer and I'll show you an example of posting transactions.

So posting cash transactions mean you connect your bank to your accounting system and you post the cash that comes in and the cash that goes out. And to do that, if I'm here inside of QuickBooks, I would go to Accounting, Bank Transactions, and here I will see a list of transactions that are sitting that I haven't yet matched to an invoice that I issued to a customer or an invoice that I received from a vendor. So for example, here I have $49,000 received. I'm going to go ahead and either match it or categorize it. Match it means if I already have an accounting record, an invoice to a customer that I can match it against, or if I don't, then I can categorize that to a revenue account, for example. Uh, in this case here, I'm going to click on Match. And under Match, I will look for a transaction of the same amount. And I have one here for Ward Smith, $49,320. It's the same amount. And I'm comfortable that this is a payment against that invoice. So I would select it and click on Match. And that's going to close out the invoice as payment received from the customer. Here I have a payment made, money spent, to Amy Goldberg for $3,000. I can click on Match. And look if there is an open bill for Amy Goldberg, and there is one open bill right here for $3,000. I can select that and match it, and that means I posted my cash transactions for the month. I have a check mark that says all the account, uh, this account here has been posted completely. You can go ahead and see if you have any other accounts and post all of the transactions for cash and credit card that is linked to your accounting system. If it's your credit card and bank transactions are not linked to your accounting system, you you would need to download these transactions from the bank and upload it into the accounting system.

Okay, great. So now we are done posting cash, whether received or spent. Now we'll go on to step number 2, which is recording transactions. What do we mean by that? Well, the 2 main transaction types that we have is invoicing our clients and receiving vendor bills from our suppliers and vendors. So recording these things require you to create a system of cutoff of some kind. So for example, for your invoicing to your clients, you might say, Well, at month end, I'm going to invoice all of the clients that I have purchase orders from up to a specific date, or all of the shipments that were made from the warehouse up to a specific cutoff date, which is typically based on your bill of lading terms and conditions. And that will define when you should be recognizing that revenue. So creating a cutoff for your invoicing, a cutoff for your vendor bill recording, all of the vendor bills received up to a specific point in time, needs to be recorded. And whatever is not recorded here in step number 2 will be captured here in AccruWorld in step number 4. So you need to have a cutoff because if you don't, you might find this creeping into maybe day 10 or 15 and month-end close, and you're not being caught up, you're not catching up on your, uh, activities. So recording means invoices, vendor bills, also means recording payroll— that's very important— uh, recording employee expenses that you may be receiving from other systems. So recording all of your transactions, you need to come up with a list of all of your transactions. And to get yourself organized in doing all of these things, typically you would have a month-end close checklist. If you want a sample of that, I'll leave a link to one down below. You can download it and use it for yourself.

So here is a sample month-end close checklist. I'm going to leave a link to it down below. You can download it. Pretty much breaks down the accounting close by area. So I have general, I have software capitalization, accounts payable, accrued expenses, etc., etc. I have the description of what to do, and this is unique to my company, but you can go ahead and sort of customize this to your own needs. I have the frequency, whether it's annual, quarterly, or monthly. Most of the things are going to be monthly with some exceptions. And I have who's the preparer and preparer deadline. You can also go, go ahead and put an approver or reviewer and deadline for them as well.

So once we're done recording all of the transactions, we can move on to reconciling our bank statement and our credit card statements. So now we're comfortable that we recorded transactions here in step number 1 and number 2, and we can now reconcile the bank statement and credit card statement, which simply means that we compare the balance on the bank statement to the balance on the books and records and make sure that they agree, with the exception of certain maybe outstanding checks or uncleared ACHs. So typically you might have a couple of days of transactions that are not posted to the books and records, and that's going to be recorded as an outstanding check or outstanding ACH transaction. And reconciling the bank and the credit card is really the only way to tell you that you are complete in these two steps here. And once you reconciled, you feel comfortable that these— all of your transactions are being captured on the books and records. Okay, now that we reconcile the bank statement and the credit card statements, we can move on to accrual adjustments. Accrual adjustments are typically, uh, broken down to two areas: revenue and expenses. Just broadly speaking, on revenue, what you're accruing, what you're adjusting for here is going to be either deferred revenue, which is unearned revenue that you recorded in the past as a liability, and now you're going to be recognizing. Also maybe unbilled revenue, which is an asset. So that's meaning that you earn some revenue but you haven't billed for it yet. So now you're going to just accrue it, saying debit to unbilled revenue and credit to revenue. Accrual adjustment will also be stock-based comp accruing for received inventory that you haven't received a bill for, an expense that you accrue for because you haven't received the invoice but you've received the service from the vendor and you're liable for it. All of these are things you can do only once you've recorded all transactions, reconciled the bank. Now you can go ahead and record your accrual adjustments. So let's go ahead and take a look at an example of an accrual adjustment.

For accrual adjustment, this is an example that I have here for a commission payment that I made to a salesperson in September of 2024. And under the guidance from revenue recognition ASC 606, this commission is considered capitalizable. So I have to capitalize this commission because it met certain conditions and amortize it over the life of the contract of the customer. So the commission payment was $52,052. And the amortization is going to take the commission amount and divide it by 36 months. That is the life that I expect for this customer contract. And I'm going to divide that by 36 months to get an amortization each month of $1,446. So if I'm closing the books for August of 2025, I'm going to record an amortization that says debit to commission expense of $1,446. And credit to the commission asset to reduce it by $1,446. So this is an adjustment or accrual adjustment that I make at the end of the period.

Okay, so we've recorded our accrual adjustments at the end of the period, and now we're ready to reconcile the balance sheet. So the balance sheet is really important because the— you can think of the activity of the month as the events of a movie that's going to land on the P&L. And the ending of the movie is the balance sheet. So that's why it's really important to reconcile the balance sheet, because you will capture any event that you missed in all of these here. So reconciling the balance sheet, uh, let's take a look at an example of how we do it.

So reconciling the balance sheet accounts will mean that at the end of the financial period, I will download my adjusted trial balance from the accounting software. So I have here the trial balance for August 31st, 2025. And I will reconcile the bank— and I will reconcile all of the balance sheet accounts. So I identify here balance sheet accounts all the way up to row 22, with the exception of the bank, because the bank statement already has been reconciled in one of the steps previously. So now I will just reconcile accounts receivable to an aging report, the allowance for doubtful accounts, prepaid expenses, all of these accounts. I need to reconcile the balance on a trial balance to a working paper or an outside source that validates this amount.

Okay.

So an example that I have here is what we talked about before, deferred commission. Deferred commission is an asset. This is a capitalized commission. The balance is 34,703. And typically I would have a cover letter, and the COVID letter says, you know, here's the account, the name of it, and the description of the account. Month end, here is the beginning balance, and I tie that into my workpaper. So my workpaper says here's my beginning balance, $36,000. And here's the activity, which is the amortization of that deferred commission for the month. And the ending balance per work in paper, $34,000. And the trial balance, balance linking that to a trial balance tab that I have right here. And then the difference here is below my threshold of investigation, $2. Usually is a rounding difference. So that will give me comfort when I reconcile all these accounts here. It will give me comfort that I captured all of the transactions that maybe perhaps either were missed in the recording or in the accrual adjustment. This will help me catch these transactions.

Okay, so we've reconciled our balance sheet accounts and feel comfortable with that. By the way, all the files that I'm showing here, I'm going to leave a link down below so you can go ahead and download it. But also, if you want to get access to all of the working papers that I have as a controller, all of my toolkit of working papers, that's going to be available in the Controller Vault. I'll leave a link down below which you can purchase and have access to. One purchase gives you lifetime access, meaning the files that I have today and any future files that I upload as well. Okay, so we reconciled the balance sheet and now we're on to the final step, which is fluxing or a fluctuation analysis of our financial statements. Now, a fluctuation analysis, and I'll show you an example here in a minute, is really a safety net. So imagine yourself as a trapeze player and you fall, and the safety net underneath you is this here. Meaning if I failed in any of these areas here, this is the safety net to tell me, wait a minute, you missed a transaction in this line item here, go ahead and record it. And that would be here. Or you missed a transaction and it shows up here, and that could be an accrual adjustment that you forgot to make for the period. So you can see the fluctuation analysis is really an important last step to capture anything you missed here. So let's take a look at an example flux analysis.

Let's take a look at an example flux analysis, which we said is like the safety net to catch you if you made any mistake. It's also like, if you think of it like the icing that goes on top of the cake, you won't be able to put the icing until you baked the cake in the oven. So all the steps that we've done before, getting to the flux is like baking the cake, and now we're putting the icing on top, which is the flux analysis. So what we do here is we flux the period. So we have end of March, we compare that to end of Feb, and we say the change, uh, this cell minus that cell, and the change percentage. And then you go through that, and then you comment on any item that stands out. So for example, here platform fees went up by 22% or $21,000. And I explained that by saying, well, I have a new customer, Harry Inc., or a customer that has more sales in the period by about $15,000. So as long as I can justify that, then I would feel comfortable with that change. So go ahead and flux all of your income statement accounts right here and investigate any large differences. Same for the balance sheet. I will flux my period over period. For the balance sheet and say, well, here is a bank account change of 26%, which is big, but I'm comfortable with that because I've reconciled my bank statement to the books and I've captured all the transactions. So there is no risk here of missing any activity. You go ahead with accounts receivable and all the other accounts and provide commentary that makes sense so that then someone can review that commentary, whether it's a controller or VP of accounting, and make sure that these things make sense. And that will capture anything you've missed in any of the other steps.

All right, so we've seen a flux analysis, we've seen the full picture of the sequence of the close, which is really important. If you want to get really good at this stuff, you want to check out the Controller Academy where I show you the entire accounting cycle from A to Z with a real company example so that you're watching me work with actual real-life data. If you like the video, give it a big thumbs up. And I'll see you in the next video.