# Closing the month

> Statements are not the end. The close proves every balance against something outside the ledger, then locks the period so the numbers can't quietly change.

Source: https://lopifi.com/learn/closing-the-month
Part of: Lopifi — US GAAP books on autopilot, reviewed by a CPA (https://lopifi.com)

---

**What does it mean to close the books for a month?** Statements are not the end. The close proves every balance against something outside the ledger, then locks the period so the numbers can't quietly change.

Three statements exist and nobody has checked a single one of them against the outside world. The [Close](https://lopifi.com/md/glossary/close) is that check, done account by account, and it is most of what a working accountant actually does.

*[The accounting cycle, at: close]*

| Step | The account | Proved against |
| --- | --- | --- |
| Reconcile cash | 1000 Cash — operating | The bank statement. Every unmatched item explained, not netted. |
| Tie out receivables | 1200 Accounts receivable | The open invoice list — the subledger. It must sum to 8,000. |
| Tie out payables | 2000 Accounts payable | The unpaid bill list. It must sum to 6,000. |
| Count the stock | 1300 Inventory | What is physically on the shelf, at cost. It must come to 1,000. |
| Prove the schedules | 1400 / 1590 | The prepaid schedule (6,600 unexpired) and the depreciation schedule (500 charged) from lesson 9. |
| Review the accruals | 2200 Accrued liabilities | What was consumed and unbilled, re-asked at 30 September. |
| Explain the movements | Every P&L line | Flux analysis — why is this line what it is? |
| Sign off and lock | The period | A named person, a timestamp, and no further posting. |

Northwind's September close, in the order it is done.

*[Interactive figure: month end close]*

Northwind's close, station by station. A step not done blocks every step after it; only when the last is signed off does September lock.

Two words in that table mean different things and are constantly swapped. [Reconciliation](https://lopifi.com/md/glossary/reconciliation) compares our record to an outside party's — the bank's. [Tie-out](https://lopifi.com/md/glossary/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.**

## A bank reconciliation, worked

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](https://lopifi.com/md/glossary/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](https://lopifi.com/md/glossary/deposit-in-transit).

| Bank reconciliation — 1000 Cash, 30 September | Amount |
| --- | --- |
| Balance per bank statement | 34,900 |
| Less: outstanding check — JE-13, September rent | (2,000) |
| Adjusted bank balance | 32,900 |
| Balance per ledger | 32,900 |
| Unexplained difference | 0 |

Every reconciling item named, and an unexplained difference of exactly zero.

*[Interactive figure: bank reconciliation]*

The bank's tape and the ledger's, fed toward each other. Every line matches but JE-13, the rent check the landlord has not banked; it goes to the tray as an outstanding check, and the unexplained difference drains to zero.

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

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

A timing difference needs no entry — the bank will catch up when the check clears. Only an item the books genuinely missed, like a bank fee, is journalled. A plug hides both kinds.

## Explaining the numbers

Every step in that table runs into the same question: how big does a difference have to be before it matters? That is [Materiality](https://lopifi.com/md/glossary/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.

— [SEC Staff Accounting Bulletin No. 99 (1999)](https://www.sec.gov/interps/account/sab99.htm), Materiality is not a percentage

[Flux analysis](https://lopifi.com/md/glossary/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.

## Locking the period

Every section ends with a [Sign-off](https://lopifi.com/md/glossary/sign-off) by someone other than the person who prepared it. That is [segregation of duties](https://lopifi.com/md/glossary/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](https://lopifi.com/md/glossary/audit-trail).

When every section is signed off, the [Period](https://lopifi.com/md/glossary/period) is closed and [Posting](https://lopifi.com/md/glossary/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](https://lopifi.com/md/glossary/out-of-period-adjustment) in the current month. One that is material to statements already issued is corrected by a [Restatement](https://lopifi.com/md/glossary/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](https://lopifi.com/md/glossary/revision) of the comparatives.

— [ASC 250](https://asc.fasb.org/250/tableOfContent), Accounting Changes and Error Corrections

**Check yourself.** The bank says $34,900, the ledger says $32,900, and the rent check from the 28th has not cleared. What does the reconciliation do?

- Post the difference to a suspense account so the close can finish on time. — That signs off a balance nobody has proved. The difference is still there; it is just harder to find.

- Adjust the ledger to the bank — the bank is always right. — The bank is an outside record, not an infallible one, and here it is simply behind. Adjusting cash would undo a real payment.

- Identify the reconciling items — here, the rent check not yet presented — and leave the ledger alone. — A reconciliation explains differences; it does not erase them. A timing item clears itself; only something the books missed gets an entry.

> **One month is a whole business.** You now have every mechanic there is: entries, posting, proof, adjustment, three statements and a close. Everything more advanced — multiple entities, currencies, consolidation, revenue recognition rules, leases — is a harder answer to the same question you have been answering since lesson 1: what happened, and which period does it belong to?

- **Lesson:** 13 of 13 — 13 min
- **Terms taught:** [Close](https://lopifi.com/md/glossary/close), [Reconciliation](https://lopifi.com/md/glossary/reconciliation), [Tie-out](https://lopifi.com/md/glossary/tie-out), [Outstanding check](https://lopifi.com/md/glossary/outstanding-check), [Deposit in transit](https://lopifi.com/md/glossary/deposit-in-transit), [Sign-off](https://lopifi.com/md/glossary/sign-off), [Period](https://lopifi.com/md/glossary/period), [Posting](https://lopifi.com/md/glossary/posting), [Audit trail](https://lopifi.com/md/glossary/audit-trail), [Segregation of duties](https://lopifi.com/md/glossary/segregation-of-duties), [Materiality](https://lopifi.com/md/glossary/materiality), [Flux analysis](https://lopifi.com/md/glossary/flux-analysis), [Restatement](https://lopifi.com/md/glossary/restatement), [Revision](https://lopifi.com/md/glossary/revision), [Out-of-period adjustment](https://lopifi.com/md/glossary/out-of-period-adjustment)
- **Previous:** [The cash flow statement](https://lopifi.com/md/learn/the-cash-flow-statement)
- **The course:** https://lopifi.com/learn