Chapter 6: Month-End and Year-End Procedures

1. Bank Reconciliation Basics

What Is Bank Reconciliation?
Bank reconciliation involves comparing your internal records (ledger or accounting software) with your bank statements to ensure both balances match. The goal is to identify any differences, such as missing transactions, errors, or bank fees.

Why It Matters

• Ensures accuracy: Detects fraudulent or unauthorized charges and catches posting mistakes.
• Improves cash flow management: Gives a clear picture of actual funds available.
• Maintains trust in financial statements: Reconciled books are more reliable for owners, investors, and auditors.

Steps to Reconcile

1. Collect Documents
   • Gather bank statements, check registers, and any digital records for the period.
2. Compare Balances
   • Check your ledger’s ending cash/bank balance against the statement’s ending balance.
3. Identify Discrepancies
   • Look for outstanding checks (issued but not yet cleared by the bank).
   • Note any bank fees or interest posted by the bank.
   • Correct any typos or double entries in your ledger.
4. Adjust Entries
   • If you find an error or a missing transaction, adjust your internal records accordingly.
5. Confirm Final Balance
   • Once discrepancies are addressed, your ledger balance should match the bank statement’s closing balance.

2. Reviewing Financial Statements for Accuracy

Key Financial Statements

1. Balance Sheet
   • Shows what a business owns (assets), owes (liabilities), and the net ownership (equity) at a specific point in time.
2. Income Statement (Profit & Loss Statement)
   • Summarizes revenues, expenses, and net profit (or loss) over a given period.
3. Cash Flow Statement (if applicable)
   • Details the inflow and outflow of cash, highlighting operations, investments, and financing activities.

Month-End Review

• Verify Debits & Credits: Ensure transactions have been classified properly in the right accounts.
• Check Account Balances: Do assets and liabilities align with supporting documents (e.g., invoices, contracts)?
• Compare Month-to-Month: Spot any unusual fluctuations in revenue or expenses.

Year-End Review

• Close Temporary Accounts: Zero out revenue and expense accounts to retain earnings or owner’s capital (depending on your accounting setup).
• Review Depreciation & Amortization: Ensure any long-term assets have been depreciated properly.
• Confirm Tax Deductions: Verify you’ve recorded all allowable expenses and have the necessary documentation.
• Look for Adjusting Entries: Accrue for any unpaid expenses or unrecorded revenue.
• Run Final Financial Statements: Present a clear snapshot of the business’s financial health at year-end, ready for stakeholders or tax filing.

Why Accuracy Matters

• Inaccurate statements can mislead decision-makers and stakeholders.
• Errors may lead to compliance issues (e.g., incorrect tax filings).
• Accurate statements enable better strategic planning and boost credibility with lenders or investors.

Key Takeaway

Monthly and yearly wrap-ups are critical stages in bookkeeping. Bank reconciliations catch discrepancies that day-to-day recording might miss, and thorough reviews of financial statements ensure that final reports accurately represent a business’s financial standing. By staying diligent with these end-of-period procedures, you help maintain the integrity and reliability of your books.