Summary: How to do your month end processes including invoicing, payroll and financial records.
Month end is considered by two thirds of small to medium business owners and management as the biggest challenge they face.
With a little planning and organisation you can get through the process in hours instead of days, whether you are closing yourself or through an outsourced accounting expert.
End-of-the-month accounting procedures are the tasks required to ensure that all of a small business’ financial records are balanced before the start of a new month.
Although end-of-the-month accounting procedures can be performed manually, various account software packages are available and can be used to ensure accuracy and allow for ease of reporting.
Financial transactions start the process.
These are split into accounts payable, receivable and in some cases payroll, or any other activity that involves the exchange of assets, incurring or settlement of a debt, or change in equity or company owners’ stake in the business.
Step 1: ACCOUNTS RECEIVABLE.
The AR process is the process by which businesses receive payments from customers for goods or services sold.
- Decisions: customer payment terms are decided either according to company policy or individual credit worthiness, or past payment behaviours.
- Receipting, Allocations: Check received amounts in the bank statement and allocate to specific invoices. Any payment which are not properly referenced, accompanied by a proof of payment, or match an invoice amount exactly to be allocated into a suspense account, or unknown receipts (current liability).
- Collections: Identifies all invoices that are short paid or unpaid and make necessary contact with the client, either by statement, collections letter or by phone (depending on ageing of the amount outstanding).
- Write off: once unpaid invoices reach a set date or are under, it would then be considered a “bad debt” and written off.
Step 2: ACCOUNTS PAYABLE.
Once you have ordered, received and checked your goods / supplies you progress to accounts payable process.
- Invoice: Print / save electronically your invoices and enter them into your accounting system. Make sure you record payment terms.
- File: Stamp / sign all entered invoices before filing away.
- Pay: When you are ready to make payment of some of the invoices as they fall due, depending on the payment terms but generally COD or 30 days, you can pull up a payables report.
- Reconcile: At the end of the month (or a few days thereafter) you will receive a statement from each of your suppliers which you can match to the statement. Never pay for an invoice that you do not have.
Step 3: PAYROLL.
Gather employee information. Make sure you have details relating to salaries, tips, overtime, and commission etc. for the specific pay period.
- Check: Check you have all employee information regarding marital status, age, and specific deductions. This will determine their tax liability to your local Revenue Services.
- Gross: Calculate gross pay from employment agreement or time sheet. Include tips, commission and overtime, if applicable.
- Exempt: Prior to calculating income tax, calculate tax exempt deductions such as retirement annuity or savings.
- Nett: If you are using an electronic payroll system, gross pay will be automatically calculated. If you are doing this manually, create a payroll calculator spreadsheet that allows you to simply put in employee hours.
- Tax: Determine state and local tax liabilities based on your location.
- Deductions: Deduct additional employee items such as retirement and savings plans, health insurance, charitable contributions or garnishments.Remember that some deductions are before-tax, some after-tax.
- Process: Process payroll manually or through your electronic payroll system. Double-check amounts before printing and disperse cash, cheques or printed proof of payments along with payslips.
Step 4: RECONCILLIATION.
The General Ledger account contains a record of the transactions (cheques, receipts, etc.) that involve its business bank account.
- Statement: Your bank statement would list the activity in the bank account during the month as well as the balance remaining in the bank account.
- Reconcile: If you are reconciling using an electronic accounting package go into the reconciliation screen and enter statement date along with beginning and end balance.
- Bank charges: You will then be asked to check off each individual transaction, and enter bank charges. This is your opportunity to catch anything which you have missed.
Once the ending balance is the same as the bank statement you have successfully reconciled your account!
Step 5: ADJUSTMENTS.
At the end of the accounting period you need to inspect your balance sheet and trial balance.
This should be done by your accountant or an outsourced expert if you do not have one in-house as mistakes are extremely difficult to pick up.
One would have to make adjusting entries to record prepaid expenses, accrue outstanding invoices, record accruals that have been paid and depreciation and other amortisations.
After adjustments have been recorded, you inspect an updated trial balance to be sure the accounts are in balance.
Step 6: REPORTING.
Once all adjustments have been made, create reports to see the status of the business:
- Profit and loss
- Income and expense report
- Cash flow projection (which will show what income is expected for each period, and
- what expenses need to be paid in the same period)
- Trial balance
- Balance sheet
Once this has been done you can send out statements to your Debtors to coax them into making payments.
Step 7: CLOSING.
You can now close the books for the income and expense accounts and begin the entire cycle again. This prevents making changes to transactions or accounts by mistake once everything has been reconciled and checked.