When working through Value Assessments, Value Scout will ask for the "TTM" financial on the "most recently closed month." And oftentimes people will ask "just what the heck do you mean by 'closed'"??

A financial close - aka closing the books- will mean something different from company to company. Bottom line, though, is that when the books are closed you do not anticipate substantive changes in recorded transactions and that your financial statements accurately represent the financial condition of the company.

With that said, below are steps that are commonly included in closing the books.

Closing Journal Entries

There are four general steps in any closing process. To match the closing entries and zero out the temporary accounts, the four closing journal entries are:

  1. Close revenue accounts to income summary

  2. Close expense accounts to income summary

  3. Close income summary to retained earnings

  4. Close dividends (or withdrawals) to retained earnings

Month End Close Process

The following steps are typically included a the end of each month to fully close the books:

1. Record all incoming cash.
2. Update the accounts payable.
3. Reconcile accounts- focus on high risk transactions
4. Review all petty cash.
5. Review fixed assets.
6. Update stock and inventory.
7. Organize and review financial statements.
8. Check expense and revenue accounts.
9. Review data before closing.
10. Prepare reporting package for management review

11. Conduct management review

Your Financial Close Process

For your own company, best practice is of course to have a robust, well documented procedure that encapsulates the above. Ultimately that procedure should be designed to assure veracity of financial statements- giving comfort to management in terms of current financial performance.

And since we are concerned about value here... a robust process can also telegraph decreased financial risk to a potential buyer!

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