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Accounting process - part 2

In Part 1 we looked at how corporate structure and design impacts the types of reporting with Record to Report (R2R). As discussed in Part 1, the reporting needs to be appropriate for both internal and external stakeholders, and the staff who are employed (or not employed!) will determine how processes are structured. In Part 2, we'll take a look at the types of processes which are part of the R2R process. In Part 3, we'll review some options for organisation design which provide efficient R2R process.


Period end close

Period end close, sometimes referred to as month end, quarter end, or year end according to the time, is the central component of an R2R procedure. During the period end close, transactions are reconciled, income and expenditure are accrued or deferred, and reports are created. Period end close contains a number of processes:


  • Income recognition - Management and external stakeholders will be interested in business performance. Income recognition at period end requires the business to review and report services delivered in addition to the sales made. Financial controllers can then verify that the income is reported correctly by deferring or accruing income.

  • Expense recognition - Expenditure also needs to be recognised when it is incurred. Expense recognition at period end requires review of services used, but not yet paid and inventory sold (cost of sales).

  • Cash and bank reconciliations - Cash and bank reconciliations confirm that the balance in the cash registers (including petty cash) and the bank accounts agree to the ledger. These reconciliations also account for money in transit, such as cheques which have not cleared.

  • Balance sheet reconciliations - Balance sheets are important not only for publicly traded companies, but also for monitoring business health. Balance sheet reconciliations allow businesses to determine solvency and profitability.

  • Tax reconciliations - After the the accounts have been prepared, tax calculations and their entries can be posted.

After the ledgers are prepared and closed, financial controllers can explain the accounts. This is not the reconciliations, rather a summary of how the accounts changed, what caused them, and some of the market changes which may impact it. This assists finance and business leadership to decide where to make investments and whether a specific business or transaction can be agreed to should continue.


Financial planning and analysis

FP&A processes are management's method of reviewing performance and making decisions. These processes rely completely on the strength of the period end close. FP&A processes include:


  • Income expectations - How much income generation is needed? How much is possible? Market trends and past performance can indicate how much the company can plan to make.

  • Budget planning and assignment - How much resource will be needed to deliver income? Are there shared costs which need to be accounted for? How will the business be "charged" for using those resources?

  • Forecasting - Income generated, charges incurred, and other changes will occur during the year. How do these changes expect to impact income, expenditure, or the bottom line?

As part of the period end FP&A analysts can provide commentary between these planned numbers and the actual amounts reported. The outcomes of comparison and explanation provide guidance to company leadership and assist in making decisions.


Connecting accounting processes

The period end close and FP&A procedures are not independent. While they serve different purposes, they should be considered as part of a single process of businesses reporting and decision making. Period end close confirms that the accounts are stated correctly and explains the reasons why the accounts have changed. The FP&A processes uses the performance to indicate future decisions.


Chayim Messer Consulting provides process development for period end close and PF&A. Regardless of your company's size (sole-proprietor, small business), there will be a need to report performance and make future decisions. Contact us today for a free process audit.

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