How to Perform the Quarterly Close Process
Learn a methodical process for closing your quarterly books, ensuring financial accuracy and establishing a reliable baseline for the next period.
The quarterly close is the process of finalizing a business’s financial records for a three-month period. An accurate close provides timely information to stakeholders, such as investors or lenders, for strategic decision-making. This process also ensures that the financial data used for tax planning and compliance is reliable and reflects the company’s actual performance.
Preparing for the Close
Preparation for the quarterly close begins with gathering all necessary financial documents. Having this information organized before starting prevents delays and errors. Key documents to collect include:
- Bank and credit card statements for the three-month period.
- Supporting documents for all business transactions, such as sales slips, paid bills, and invoices.
- Payroll reports detailing gross wages, taxes withheld, and other deductions.
- Documentation for new financial activities, including loan agreements or records of fixed asset purchases like equipment or vehicles.
Key Reconciliation and Adjustment Procedures
With all documents gathered, the first procedure is reconciling bank and credit card statements. This involves comparing each transaction from the statements against the entries in the company’s accounting records to ensure cash balances match the bank’s records. This process identifies discrepancies like outstanding checks, deposits in transit, or bank service fees that need to be recorded.
Next, review accounts receivable (AR) and accounts payable (AP) by generating and analyzing their aging reports. The AR aging report helps identify any overdue customer invoices that may require follow-up or could become bad debt. Reviewing the AP aging report ensures that all vendor bills have been received and recorded, preventing unrecorded liabilities.
The final procedure is recording adjusting journal entries to align the financial records with the accrual basis of accounting. These entries account for transactions that have occurred but are not yet recorded in daily bookkeeping. Common examples include accruing for expenses that have been incurred but not yet invoiced, such as utilities, and recording depreciation expense for fixed assets.
Generating and Analyzing Financial Reports
After posting all adjustments, the next step is to generate an adjusted trial balance. This internal report lists the ending balances of all general ledger accounts and is used to verify that total debits equal total credits. Any imbalances must be investigated and corrected before moving forward.
Once the trial balance is in balance, the main financial statements can be prepared. These are the Income Statement and the Balance Sheet. The Income Statement summarizes the company’s revenues, expenses, and resulting net income or loss over the quarter. The Balance Sheet provides a snapshot of the company’s assets, liabilities, and equity at the specific end-date of the quarter.
Analyzing these reports provides insights into the business’s performance. A common method is variance analysis, which compares the current quarter’s financial results to the budget or to prior periods, such as the previous quarter or the same quarter of the previous year. This comparison helps management identify trends and operational anomalies. Investigating large variances can reveal areas of the business that are performing better or worse than expected, providing information for future strategic decisions.
Finalizing and Closing the Period
The final action is to formally close the books within the accounting software. This technical step finalizes the accounting period and locks the transactions recorded within it. Performing this function prevents any accidental or unauthorized edits to the records of the closed quarter, which maintains the integrity of the financial data.
By closing the period, a clear starting point is established for the next accounting quarter. The ending balances of the balance sheet accounts from the closed quarter automatically become the beginning balances for the new quarter. This ensures a continuous financial history, which is necessary for accurate year-over-year analysis and for auditors.