How To Do Month End

Month-End Procedures
For the Work From Home Business Owner

In this article, I will chat about how to perform month end procedures for a small work at home business. I'll begin by giving an overview of what happens in large companies, then move on to small business procedures.

Month end is a big deal in large companies. Everyone works through their bookkeeping checklist, scrambling to get all their entries booked by the last working day of the month.

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Then the first three working days are spent scrutinizing the P&L (profit and loss) and A&L (assets and liabilities) accounts and booking adjusting entries.

Once these are booked, another run is performed so that preliminary financial statements can be given to management to review.

More adjusting entries are booked and the final run is made ... final financial statements are issued and the ledger is closed for that month ... by the fifth working day ... when the financial planning department swings into action ... reviewing and revising the business plan.

Each person keeps copies, in their offices, of their own journal entries with backup along with their reports which are filed in binders with monthly tabs. One binder contains the general ledger (GL), another the financial statements (FS), and another the journal entries that they booked with their backup. The binders are great to look up information if the system is down ... or management asks a question.

If an account is complicated enough, an excel spreadsheet is created to show how the account works with a month by month analysis. These spreadsheets save the company money as they help the external accountants do the year-end audit.

Any errors found now that relate to that month must be booked as a correcting journal entry in the current month.

But how do you do month end for a small business that operates out of their home? It is basically the same ... but there is more wiggle room on your dates.

The important thing is to have a month end process and perform it every month. If you start the procedures now, while your business is still small, you won't have to scramble as your business grows ... and you'll be comfortable handing over tasks that you are now comfortable and familiar with ... allowing you to supervise and manage the financial area with ease.

If you are a goal oriented person, as many small business owners are, you might think of these procedures as month end goals.

I'm going to suggest that your month end process does not have to be perfect ... but at the end of each quarter, you take the time to do a really thorough job. Why?

• You are filing your GST report and you want it right ...
• It will make your year end go more smoothly (and therefore less costly) ...
• You will be on top of any problems ... being proactive instead of reactive.

It's a nice spring day here so I'm going to switch my beverage from tea to lemonade. :-) So pull up a chair and let's get started ... shall we.

Assumptions

First off, I'm going to keep this simple and assume you are a small business working from your home, with minimal to no inventory. This means I'm also going to assume no separate systems that need to be integrated (no summary entries posted).

I am not going to explain how to book any adjusting entries just yet ... but I will explain the types of adjusting entries your bookkeeper or accountant would likely book.

I will cover how to "fix" some software use problems ... that you discover while doing your month end ... in a separate upcoming article.

My main goal here is to keep this very simple for you and give you a method to self-assess how your bookkeeping is going.

Your main goal is accurate and timely financial statements that you can use to run your business and reduce your accounting costs.

Month End Procedures

Here is your bookkeeping checklist for month-end. Just to keep things simple ... perform your month end as soon as you have your bank and credit card statements. If you sign up for e-statements, you should be able to start sometime in the first five days of the month.

1. Back up your file NOW ... just in case you really screw up this month end :0) ... you will have a chance to start again ... instead of paying a bookkeeper to fix everything up.



2. Complete the data entry of ALL your transactions pertaining to the month. Take a moment now just to enter any straggling (Is that a word? If not, it should be because I like the sound of it!) invoices or receipts ... and don't forget all your cash receipts that were paid with business funds.
• Business expenses paid with personal funds are handled differently.
• Hopefully you have setup your record keeping system ... and have been organizing and entering your data in batches on a particular day each week ... say Wednesday afternoons or Thursday mornings.


3. Invoice any customers for work performed during the month and for which you have not yet billed.
• You want to make sure that anyone who owes you (as in your business not you personally) money is listed in your accounts receivable.


4. Key in all money received from customers or the government but not deposited into the bank yet ... also key in any unrecorded deposits made.
• If you are using QuickBooks, I enter it by issuing a "sales receipt" if no invoice was issued. If the payment received pertains to an outstanding invoice on your Account Receivable report, enter the payment to "receive payments" under the Customer drop down menu.
• If you are using QuickBooks, a good internal control measure is to record all customer payments to the Undeposited Funds account using Receive Payments or Sales Receipts. When you make a bank deposit, you group together the payments that are included in your bank deposit ... this makes reconciling your account easy. At month end, go into bank deposits and make sure you track down every customer payment in the window that has not been deposited to the bank. Find out when it was deposited and record the transaction.
• The Bookkeeper's Tip - If you make customer payment deposits directly through the Make Deposits windows, you may double book an entry. ... (1) Booking a customer payment deposit to an income account through Make Deposits records the income twice. Once when you generated the invoice/receipt and again when you made this deposit. ... (2) Booking a customer payment deposit to an accounts receivable through Make Deposits records the payment twice. Once when you Received Payment/Sales Receipts and again when you made this deposit. ... The benefit to you in using Receive Payments/Sales Receipts and Undeposited Funds for all customer receipts is preventing income from being recorded twice and/or recording customer payments twice ... which of course makes the month end review easier for you.


5. Make sure all your unpaid bills are entered into accounts payable ... also key into accounts payable any unrecorded bills you paid but you can't remember how or from where because you didn't follow this tip.
• You want to make sure that anyone you (as in your business not you personally) owe money to is listed in your accounts payable.
• As you perform your reconciliations, you will be able to figure how you paid those unrecorded bills. When you do, you will process the outstanding accounts payable bills accordingly.


6. If there is a "total balance owing" on any of the bills (for example Telus and BC Hydro always have carry forwards on their bills) ... or you have vendor statements ... you want to balance each vendor's account to their reported balances.
• You could do this step anytime during the month by setting aside a particular day every month, like the 20th or every 4th Wednesday, to reconcile accounts payable to the vendor statements.


7. Check to make sure you have entered all your memorized recurring transactions like automatic bill payments for accounts that are on a budget plan or loan payments.



8. Do your monthly credit card reconciliation. Enter any unrecorded transactions. Attach the completed reconciliation report to the credit card statement. File both according to the record keeping system you have put in place.
• If you have any charges that you don't have legitimate receipts for, book these entries to a current asset account I like to call "No receipt No tax deduction". As you locate or request copies of these missing receipts, you would then journal them out of this clearing account to the appropriate expense account. (Any entries left in the account at year-end are charged to Owner's Draw.) This helps to audit proof your accounting records ... Remember that for every receipt you don't have, your taxes just went up.


9. Reconcile your line of credit and/or loan balance to your loan statement or online balance as of the end of the month.
• You might have to book an adjusting entry if the interest portion of the loan payment was posted to the loan account or the entire loan payment was expensed.


10. If you purchased any assets this month, make sure they have been recorded properly. Assets, like equipment over $500.00, should be capitalized not expensed.



11. If you received any loan proceeds during the month, take a moment during month end to make sure they have been recorded properly ... Loan proceeds are not income. If you post your loan proceeds to income, your taxes just went up.



12. Make sure you have posted all your draws or expense reports for the month. Also record any loans or contributions you have made to the business during the month.



13. Do your monthly bank reconciliation. Enter any unrecorded transactions. Attach the completed reconciliation report to the bank statement. File both according to the record keeping system you have put in place.



14. Run your preliminary month end reporting package:
• Budget vs. Actual Report
• Statement of Financial Position (Balance Sheet)
• Statement of Operations (Income Statement)
• Sales Report
• Job or Class Reports
• Aged Accounts Receivable and Accounts Payable Reports (They should match the balances in your general ledger)


15. Perform your monthly review. Don't skip this step. It is important to go through your accounts. You are searching for possible errors, omissions or any unusual balances.



16. Book any necessary corrections.



17. Run your final month end reporting package and file it on paper or electronically. It is a good idea to run these additional reports for future reference if necessary:
• Your General Ledger for This Month
• Cheque Register to show your audit trail of sequential cheque numbers. (In QuickBooks I run the missing cheques report and rename it.)
• Plus any other of your favorite reports


18. Close your books for the month so no more entries can be booked to this accounting period.
• In QuickBooks, you will find the "closing date" feature under the Company drop down menu.
• The reason for closing the period is that you don't want anyone to edit, void or delete transactions that you have reviewed, reconciled and approved during your management review. Any errors found after you have completed month end and closed the period should be corrected in the current or open period.


19. Back up your file NOW following your backup procedures and policies you have put in place.


20. Once you have closed your books, month end is complete. You are ready to perform the routine all over next month. At the last month of your fiscal year, year-end procedures will have to be performed. Most small business owners do not handle this task themselves. They usually hire a bookkeeper or accountant to do year end and prepare the business tax return to ensure they get all the deductions they are entitled to.

Good accounting procedures should be in place so that transactions are NOT voided and deleted whenever you want to ... even if the software program (like QuickBooks) allows you to.

So here are a few basic good bookkeeping practice rules on when to delete or void a transaction in QuickBooks.

• You can delete a cheque that has NOT been printed or issued. Once it has been printed, you should void the cheque to maintain your audit trail of sequential numbers and history of the transaction.
• ... if in doubt, choose to void the transaction instead of deleting the transaction ... but NEVER use either of these functions in a closed accounting period ... unless you like paying big bucks to your bookkeeper or accountant!
• You can delete an invoice that has NOT been printed and sent out. Once it has been issued, you should void the invoice to maintain your audit trail of sequential numbers and history of the transaction. The same rules and logic for cheques apply to invoices.
• You can reverse (cancel) a stale dated cheque if the cheque is outstanding on your bank reconciliation after six months. Learn how to reverse stale dated cheques properly in my article on Monthly Management Review. You can use the same procedure to void a cheque properly if the accounting period has been closed.

The Bookkeeper's Good Bookkeeping Practice Tip

Whenever you void a transaction, write a note in the memo field explaining why the transaction was voided.

Do you use QuickBooks for your recordkeeping?

Remember, if you make an error and you are in an open accounting period in QuickBooks ... you can always edit your transaction rather than delete it.

How do you edit a transaction in QuickBooks?

Find and open the transaction. Make any changes you need. Save the changes ... but do this only if the transaction has NOT been cleared in a credit card or bank reconciliation ... or printed and issued as discussed above.

How do you know if a transaction has been cleared in a reconciliation?

In the chequing account or credit card account registers .... you should see a check mark in the cleared field. This tells you it is a reconciled and cleared transaction .. and a warning message should come up telling you are editing a cleared transaction.

I prefer to only delete a transaction if I do an "oops". :0) Here is a common "oops" made by beginners using QuickBooks.

Let's say I used the wrong QuickBooks form ...

... Before month end starts, I use Write Cheques to pay a bill. Before I print the cheque, I check the vendor's balance in the Vender Center to make sure I did the entry correctly ... and I see that the bill I'm paying was entered into Accounts Payable ... oops!

In this instance I would delete the cheque I just entered (because I hadn't printed it yet), go to Pay Bills, and pay the bill from there. Now when I check the vendor's balance, I can see that I have the correct balance.

If I hadn't caught my error, my books would have shown the expense twice on the income statement (golly no wonder I'm not making money!) and the bill still outstanding in accounts payable ... even though I'm certain I paid the bill ... and I'm thinking "why is this stupid program not working?" :0( ... when it wasn't the program at all ... but just me not following correct accounting procedures ... which is going to make my month end harder to do!

What if you didn't catch this error before you printed and sent out the cheque?

Let's say you don't catch your error until you are reconciling your vendor accounts at month end.

If you are in an open accounting period, just select the cheque you issued to pay the bill, and change the coding from an expense account to Accounts Payable. Then go to Pay Bills and apply the credit to the appropriate bill.

If the accounting period is closed when you catch your error, book an adjusting journal entry debiting Accounts Payable and crediting the expense account. Then go to Pay Bills and apply the credit to the appropriate bill. You will have to enter the vendor name on the Accounts Payable line in order to post the journal entry.

Month End / Year End Adjusting Entries

Unless you have some bookkeeping training, it is best if you leave adjusting entries to your bookkeeper or accountant.

Adjusting entries are journal entries that are made at the end of an accounting period (like month end or year end) to adjust the books to GAAP or GPE.

Adjusting entries can be done any time throughout the month ... not just at month end. However, this will give you an idea of possible instances you (or your bookkeeper) might want to book an adjusting entry at month end:

• Reclassifying a transaction ... maybe because it was posted to the wrong account or job ... or the interest expense from a loan payment was booked to the Loan account on the balance sheet.
• I like to start the memo with EC (for error correction) so that when I'm reading the ledger, I know it is a correcting entry.
• At year-end, you will want to reclassify the current portion of your long term debt.


• Reversing a transaction ... in a prior accounting period that has been closed. Some reasons why you might want to reverse a transaction are:
• remove and reissue a stale dated cheque;
• reverse an accrual to book a revised accrual or because the actual has been booked (look in your Accrued Liabilities account for accruals currently on your books);
• correct an accounting error discovered so you can book the correct entry ... it's just plain wrong and not a simple classifying error described above.


• Recording amortization for the period.
• This is a non-cash entry that debits amortization expense on the income statement and credits accumulated amortization on the balance sheet ... no cash is involved ... you spent the cash when you purchased the assets.


• Allocating prepaid expenses or customer prepayments.
• You need to expense the portion you have used of expenses paid in advance, like insurance or rent.
• You need to book the amount of income you have earned for the month by a customer who paid in advance.


• Recording a bad debt allowance on a GAAP or GPE basis.
• In QuickBooks, write off an individual customer bad debt using the "Credit Memo" button on your invoices or sales receipts ... be sure you have setup a bad debt item as an Other Charge in your item list (coded to the account bad debt allowance NOT bad debt expense) ... and select the bad debt item when recording the credit memo.

  Note: GAAP books bad debt using the bad debt allowance account. If you are doing your books on a tax basis, your Other Charge item would be coded to bad debt expense instead of bad debt allowance.

  To complete this transaction, go to Receive Payments and apply the credit memo to the outstanding/unpaid invoice. If you were using the specific method of write-off for your bad debt allowance, you will have to do a journal entry to reverse/remove this item from your bad debt allowance.

  You should also understand how GST/HST affects bad debt and what reporting needs to be done.






• Accruals for unrecorded transactions that have occurred such as professional fees ... just as an example.
• If any expenses have been accrued, you will probably see an account on your balance sheet entitled Accrued Liabilities.
• At year-end, you will want to accrue your payroll for earned but not yet paid expenses.

The Bookkeeper's QuickBooks Tip - Most month end adjusting entries should be done using the proper QuickBooks form rather than the manual journal entry if you want the entry to post and report properly.

• Amortization, loan interest, and tax provisions should be done through a manual journal entry.
• Inventory or payroll should NOT be done through a manual journal entry. Your subsidiary ledger will not balance to your general ledger if you use the manual journal entry.

Sometimes, the paperwork has not come through for expenses or revenues that have happened before your month end ... so it is necessary to book an accrual. Accruals and deferrals are regularly booked as part of doing year-end.

The accrual will be for expenses that have been incurred but not reflected in your records yet ... or for revenues you've earned but not booked yet.

A good example of accruals would be interest. Interest expense on a bank loan may have to be accrued or interest income may need to be accrued for a term deposit.

A deferral is where a transaction has occurred by month end but it affects more than one accounting period. A good example of this would be prepaid expenses or unearned revenue from customer deposits.

Good luck with your month end! ... and remember if you develop the habit of consistently working your way through this bookkeeping checklist every month, the routine gets easier and you stay on top of any problems that arise.