Closing the month

Three statements exist and nobody has checked a single one of them against the outside world. The close is that check, done account by account, and it is most of what a working accountant actually does.

Two words in that table mean different things and are constantly swapped. Reconciliation compares our record to an outside party's — the bank's. Tie-out proves a general ledger balance against our own supporting detail — the invoice list. Both are controls; only one involves a third party.

A balance nobody has proved against something outside the ledger is an assertion, not a fact. The close is where assertions become facts.

Suppose the rent on the 28th was paid by check and the landlord has not deposited it yet. The bank statement at 30 September then shows $34,900, and the ledger shows $32,900. Neither is wrong. The check is an outstanding check — in the books, not yet at the bank — and the reconciliation lists it by name. The mirror image, cash banked late on the 30th that the bank records on 1 October, is a deposit in transit.

Dr Cash 2,000 / Cr Suspense 2,000
"to agree to bank"

Outstanding check JE-13   (2,000)
No entry. Follow up if not cleared in 30 days.

Every step in that table runs into the same question: how big does a difference have to be before it matters? That is materiality, and the tempting answer — a fixed percentage of revenue or of net income — is one the SEC has explicitly rejected as a substitute for thinking. A percentage can be a starting point; it cannot be the whole judgment, because a small error that turns a loss into a profit or hides a breach of a covenant matters whatever its size.

Flux analysis is the last review before sign-off: every P&L line set against what it should have been, with a sentence for anything that moved more than a set threshold. In a normal month that is last month and the budget. Northwind has no last month, so September is read against expectation — payroll should be what the payroll register says, rent what the lease says, cost of revenue 54% of sales if the price list holds. A line nobody can explain is a line that has not been reviewed.

Every section ends with a sign-off by someone other than the person who prepared it. That is segregation of duties, and it is the oldest control there is: the person who can post to cash should not be the person who reconciles it. The sign-off, the preparer, the reviewer and the time are all part of the audit trail.

When every section is signed off, the period is closed and posting to it stops. This is what makes a reported number durable: someone reading September's statements in March gets the same figures the person who signed them off saw. An error found afterwards is corrected in the open period, and how depends on how much it matters. An immaterial one is an out-of-period adjustment in the current month. One that is material to statements already issued is corrected by a restatement — the prior period reissued, openly, with the error disclosed — and the in-between case, immaterial to the old period but too big to absorb in the new one, is a revision of the comparatives.