Period-End Soft Close Procedure

Some organizations avoid the hassle of closing the books every month, instead focusing on a quarterly close. This is most common for entities that are publicly held, and which are therefore required by law to provide complete quarterly financial statements. Even in these cases, it is useful to complete a soft close at the end of those months that are not at the end of a quarter so that management has some idea of the company’s financial results as it approaches its quarterly reporting period. It is especially useful if a company is closely tracked by outside analysts who may ask the company for information about expected results as the end of each quarter approaches.

A soft close requires somewhat less work than the normal “period-end close“, because inventory counts are usually avoided and accruals are more roughly estimated.

An example of the procedure for a period-end soft close is as follow:

 

-1 day: Controller
Review closing schedule and distribute to staff.

 

-1 day: General Ledger Accountant

  1. Verify that recurring journal entries are still correct for the current reporting period.
  2. Review financial statements with the most recent information and investigate unusual variances.
  3. Set up journal entry forms for the coming close.

 

+1 day: General Ledger Account

  1. Complete the online bank reconciliation.
  2. Accrue estimated bank charges and the interest income and interest expense.

 

+1 day: Payroll Clerk

  1. Accrue for unpaid wages.
  2. Accrue for unused vacation and sick time.

 

+1 day: Accounts Receivable

  1. Complete billings to all customers.
  2. Review accounts receivable aging with the controller and determine the Clerk amount of a bad debt accrual.

 

+2 day: Controller
Review the bank reconciliation.

 

+2 day: Accounts Payable Clerk

  1. Review cutoff information and accrue for any missing supplier invoices based on purchase order costs.
  2. If no purchase order system in use, accrue based on history of recurring supplier invoices.
  3. Accrue for any unpaid medical or dental insurance, or other employee benefits.
  4. Review the repairs and maintenance account to see if any items charged here should be shifted to a fixed asset account.

 

+2 day: Cost Accountant

  1. Allocate overhead costs at the historical rate.
  2. Charge cost of goods sold at the historical percentage, comparing to the mix of products sold at their standard costs for verification.

 

+2 day: Fixed Assets Clerk

  1. Review asset sales and disposals, and update fixed asset records accordingly.
  2. Record gains and losses on the sale of assets.
  3. Update the fixed assets schedule and calculate depreciation.

 

+2 day: General Ledger Clerk

  1. Complete all remaining accruals.
  2. Review the construction in progress account to see if any projects can be finalized; if so, shift to a fixed assets account and initiate depreciation.

 

+3 day: Financial Analyst

Complete all operating data for inclusion in the financial statements.

 

+3 day: Controller

  1. Consolidate incoming entries from subsidiaries.
  2. Complete a preliminary set of financial statements.

 

+3 day: Tax Manager
Accrue for income tax expense.

+4 day: Controller

Finalize the financial statements and issue to the distribution list. The following reports should be included in the statements:

  • Balance sheet
  • Income statement
  • Statement of cash flows
  • Income statements by department
  • Key operating statistics

 

A comparison of the soft close procedure to the period-end procedure reveals that the soft close contains less than half the number of closing steps. Here are some of the items that one can avoid through the soft close:

Petty cash reconciliation. Though there can be a control problem if petty cash is not reconciled regularly, any adjustments to the account (even if the entire balance is missing) will still be too small to impact the income statement; thus, one can avoid it.

Cancel old checks. Canceling checks that have exceeded a set amount will merely increase the amount of cash and accounts payable, and will have no impact on the income statement at all. Also the dollar amount of cancelled checks tends to be a small number. Consequently, avoiding this step has little impact on the financial statements.

Bad debt write-off. There is no point in writing off uncollectible accounts receivable during the closing period, as the amount is offset by the bad debt allowance. Thus, there is no impact on the income statement at all, and the accounts receivable balance net of the reserve for bad debts will be unchanged. This does not mean that write-offs will only occur at the end of a quarter, but that the write-off process can occur at other times besides the closing period.

Detailed balance sheet schedules. Though it is good practice to maintain a detailed schedule of the contents of every balance sheet account, one can review these both before and after the closing period to ascertain their accuracy, thereby avoiding this time-consuming task during the soft close. However, if the accounting department has a history of having incorrect schedules, this may have to be reviewed during the close for accounts with larger balances.

Bill of materials (BOM) accuracy review. The soft close substitutes a review of BOM accuracy with a cost of goods sold calculation that is based on the historical cost of goods sold percentage. This figure is the most likely to be inaccurate, because the mix of products sold may vary in the current month from that of the periods from which the historical average was taken. If this appears to be the case, one may still have to use bills of materials to derive a standard cost of goods sold, which can be used as a cross-check of the historical cost of goods sold percentage.

Physical inventory count. As long as historically derived cost of goods sold percentage is used to calculate the cost of goods sold for the soft close, there is no need to determine the actual amount of the ending inventory. This can be a very time-consuming step, so it is one of the most common tasks that is dropped from the soft close. If there is an ongoing problem with the accuracy of the inventory, then the controller can always conduct an inventory review at any other time besides the soft close to determine the extent of any variances from the inventory book balance and incorporate this variance into the results for the following accounting period.

Elimination of prepaid expenses. Unless there is a large quantity of prepaid expenses on the balance sheet, the incremental shifting of these items to expenses will rarely have a significant impact on the income statement, so it can be avoided for a soft close. Even if the decision is made to reduce the amount of prepaid expenses amount, this task can easily be completed during some other time than the closing process.

Pension and payroll tax accruals. Though the expense associated with a company’s contribution to the employee pension plan and all payroll taxes must certainly be recorded as part of the soft close, there is no need to spend time verifying the exact amount of the liability that has not yet been sent to the pension plan or government entity. This later calculation only impacts the balance sheet, so it can be avoided for the soft close.

Software module closing. Though some accounting software packages will require users to close out the current month before shifting to the next one, others will allow several periods to be kept open at the same time. This can save a small amount of time during the soft close, as some time for processing and report printing is usually associated with a module closing.

The number of tasks just described that can be skipped in a soft close is considerable. However, these deductions from the standard closing procedure must only be made in light of the accuracy of records within the accounting department. In particular, using a historical cost of goods sold percentage can yield surprising results when the quarterly “hard” close must be completed, because the historical percentage may have no bearing on the different mix of sales, production operating costs, and changes in overhead costs that have occurred since the last hard close. If this appears to be the case, be sure to crosscheck the figure with a compilation of product standard costs from a company’s bills of materials.

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Author: Lie Dharma Putra

Putra is a CPA. His last position, in the corporate world, was a controller for a corporation in Costa Mesa, CA. After spending 15 years as a nine-to-five employee, he decided to serve more companies, families and even individuals, as a trusted business advisor. He blogs about accounting, finance and tax, during his spare time, and helps accounting students (around the globe) to understand the subject matter easier , faster. Follow him on twitter @LieDharmaPutra or add him to your circle at Google Plus Lie+

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