PERIOD END PROCESSING
At the end of each accounting period, the general accounting department carries out a series of special steps for closing out the accounting period. This closing process usually extends several days into the new fiscal accounting period, and is a source for frustration among many financial executives. People frequently complain about the amount of time and effort required to close. Other complaints come from those who receive valuable period end financial and management reports long after period close. The following conditions can contribute to this:
• Inefficient and ineffective automated support.
• Excessive manual effort in preparing period end journal entries.
• Excessive manual effort in financial report preparation.
• Waiting for financial results from other organizational units.
A well-run accounting department can close financial activity and produce financial reports within five days of the end of the previous period. Accomplishing this, and avoiding delays, requires effective use of the automated general ledger system as well as some well-planned closing activities.
CLOSING THE ACCOUNTING PERIOD
Figure 9-11 identifies steps typically required for closing the accounting period. To indicate the extent that automation is involved, look at the general ledger system overview in Figure 9-1: the closing process spans the entire system.
Completing Required Journal Activity. The first three tasks of Figure 9-11 identify the necessary steps for completing the required closing activity for each period. In most businesses, this begins with closing out the subsidiary accounting systems. Journal entries from systems such as accounts payable and accounts receivable must be received and posted before most other period closing activity can occur.
Automatically journalizing routine accounting activity from subsidiary accounting systems helps reduce the general accounting department's workload at period end, leaving them better able to focus on period end tasks that require an accountant's time, such as
• Accruing for in-process activity,
• Journalizing activity for subsidiary accounting systems that do not interface to the general ledger system.
• Journalizing activity that will never be accounted for by any subsidiary accounting system, such as the issuance of new stock.
Often much of this effort can occur only at the end of each fiscal period. To effectively utilize general accounting department resources during this time, the department should take advantage of system features that assist with efficient journal preparation. Recurring journal entries and templates for standard journal entries are particularly useful for achieving a timely period end closing. The use of recurring journals allows the system to receive routine period end activity almost without an accountant's assistance. Creating standard journals from a template allows an accountant to peruse a master "list" of period end journals and complete those that apply.
Account Analysis. Completing the required journal activity relies largely on staff-level accountants who have been trained to handle the routine accounting activity that occurs during each accounting period. In most organizations the first time a more senior-level accountant, such as the controller, sees all of the accounting activity for the period is during his period end review of the accounts.
This account analysis assures the controller that the information posted to the accounts is both accurate and complete. That is to say, the journal entries accurately reference the proper accounts and that all journal entries required for the current accounting period have been posted. In a sense this allows the controller to check the effectiveness of the general accounting department's work.
To assist the controller in this review, the general ledger will produce a detailed report, called the general ledger report, for each accounting company identifying all activity posted by account during the period. Figure 9-12 shows a popular format used to present this information. (Notice the similarity to the general ledger journal.' ) An alternative format, used less frequently, shows only the total debit and credit activity posted to the account during the period just ended.
A flexible system will allow an accountant to produce the general ledger report according to various criteria for account selection:
• All accounts.
• Only accounts with activity for the period.
• Only accounts in a certain range.
• Only accounts in a certain budget center.
In addition to such rules for selecting the accounts, the system can allow the accountant to request that the journal activity cover either only the current period or any range of contiguous periods. Normally the first or second criteria are used to print the general ledger report for period end account analysis.
As a result of this account analysis, the controller may decide to reclassify certain financial activity or he may note that particular accounting was not completed. In either case, the controller may develop adjustments that are posted back to the accounts in order to complete the period end process.
Management Reporting. Most organizations produce a complete set of management and summary financial reports when ending out the accounting period. Examples of these include
• The income statement, used for reporting a comparative and analytical breakdown of revenues and expenses.
• Budget versus actual reports by budget center, sent to each budget center manager.
• Key indicator reports that highlight statistical and financial information.
• Other financial reports, such as a balance sheet or a statement of changes in financial position.
• Special analyses and schedules, such as may be required for the board of directors or to honor other specific requests from executive management.
From a timing standpoint, this management reporting normally occurs after the controller has completed his review of the period's activity and after all adjustments have been posted. Obviously this makes the most sense because it allows the reports produced to have the benefit of this review. However, in situations in which the account analysis takes too long, the accounting department may have to release preliminary management reports to satisfy demands for prompt period end financial reporting. Chapter 12 discusses the system capabilities and features required for this reporting in more detail.
NEXT MONTH'S TOPIC: Year End Close