Your company's finances run continuously day by day, but it's a good practice to reconcile your books periodically to get a "you are here" overview of its financial health. Your quarterly and annual reports are the most important, but usually you'll also do a month end close. It's an opportunity for your accountants to tie up loose ends, resolving and accounting for the month's financial activities.
In accounting, the month-end close involves the routine processing of journal entries and financial statements to achieve a proper cut off of that month's transactions.
A financial month end close is essentially a snapshot of all financial activity and transactions for the month. These include all bills and expenses paid, as well as all payments and income received for that month. Depending on your organization's accounting system, month end closing processes can be done in hand-written journals, computer spreadsheets or a full-blown accounting program.
You'll need to perform a handful of specific processes as part of your month end close. These vary from one organization to the next but the general concepts remain the same. Accounting departments process all accounts payable transactions from the first day of the month through the final day of the month. All payroll information for the month is also reviewed and processed. If any pending transactions are unaccounted for, such as unpaid money owed to the company for the month, all of those transactions need to be completed before the month can officially close.
There are lots of ways you can define your "month" for accounting purposes. Many businesses define a financial month based on the calendar. For example, Jan. 1 through Jan. 31 might be a financial month. Other businesses might define a month differently. For example, a financial month might be Jan. 15 through Feb. 15. If your company operates on a fiscal year system, where the business year starts in July or another month, then the fiscal month will start and end on a different day than the first and last day of the calendar month.
Closing a month doesn't typically happen on the last day of the month. It usually takes your accountants at least a few days to finalize all transactions and officially close a month. Sometimes, the process can take a few weeks, depending on how complex the transaction are and how diligently the accounting department accounted for all transactions during the month. If a bill remains unpaid for several weeks or more, the month cannot be officially closed until that transaction is accounted for. Therefore, some accounting departments begin to get aggressive about unpaid bills after the bill is past due, as the unpaid transaction delays their ability to close a month.