Month-End Close Checklist for a Small Business or Startup

What is on a month-end accounting checklist for a small business?

A month-end close is a fixed routine that makes the month's books agree with outside records. The IRS advises reconciling the checking account each month, and its recordkeeping guidance asks for books that clearly show income and expenses. Work through the steps in this order:

1. Collect the statements: every bank, card and payment-processor account, the payroll reports and the loan statements.
2. Reconcile each bank and card account to its statement.
3. Clear unmatched and uncategorized items, and enter bank charges the books lack.
4. Tie payroll to the payroll report and to the tax deposits made.
5. Tie receivables, unpaid bills, loans and sales tax collected to their lists and statements.
6. Record owner draws and contributions, and move personal charges out of expenses.
7. Review the profit and loss statement and the balance sheet against the prior month.
8. Note the payment dates ahead, then lock the month: set the software's closing date so changes to a closed month are blocked or flagged.

To tie a balance is to check that it equals an outside record, such as a statement or report. The SBA names the same areas: receivables, payables, cash, bank reconciliation and payroll.

No federal tax rule sets a close date: close before the first date anyone relies on the numbers (see the last section).

A close is not simple with employees in more than one state, sales tax accounts in several states, a lender or investor who wants reports by a set date, several owners taking money out, or books already behind. Each adds a tie-out that a bank statement cannot check. Reports that arrive late or look wrong, or a routine nobody owns, are signs that a checklist alone may not be enough.

Gather first: bank and card statements, payment-processor reports, payroll reports with deposit confirmations, loan statements, and last month's closed balance sheet.

In what order should I reconcile the accounts?

Reconcile the cash accounts first, then the accounts that feed them, and review the reports last. No rule sets this order; it is working practice. A transfer between two accounts appears in both, so settling the bank side first leaves fewer unknowns on the card, processor and loan side.

Imported bank feeds do not reconcile anything; for why, and for a reconciliation that does not take a weekend, see bank feeds are not reconciliation. For card payments, see credit card payments in the books; for processor payouts, reconciling sales and payouts.

How do I reconcile the checking account and find a difference?

Reconciling means making the bank statement, the checkbook and the books agree. They can differ for two ordinary reasons: the statement includes bank charges not yet entered in the books, and it leaves out deposits made after the statement date and checks that had not cleared (Publication 583).

The IRS steps, in order:

1. Compare the statement's deposits with the books' deposits and note each difference in amount.
2. Compare each cleared check or payment, by number and amount, with the books. Entries with no match on the statement are outstanding.
3. Prepare a bank reconciliation. The publication's example starts from the statement balance, adds deposits not yet on it and subtracts outstanding checks.
4. Enter what the books lack, such as service charges.
5. Check that the adjusted statement balance equals the adjusted books balance. If not, go back through the earlier steps.

If a card or loan statement closes mid-month, reconcile to its statement date; the month is final once the statement covering its last day arrives.

To find a difference that remains, Publication 583 starts with the books: last month's ending balance, plus the month's deposits, minus its payments, must equal this month's balance. If not, a check or deposit was recorded wrongly. In software, compare the month's total deposits and total payments separately with the statement, then narrow to the day and the item.

Typical causes are an outstanding item, a bank charge or automatic debit never entered, a wrong amount, an entry made twice, or an entry in the wrong account. Working checks, not IRS rules: a difference equal to one transaction means it is missing or entered twice; twice that amount, entered on the wrong side; a multiple of 9, often swapped digits. If it survives a line-by-line pass, stop adjusting to force it and get a second pair of eyes. If the starting balance no longer matches last month's statement, a transaction in a reconciled month was usually edited, deleted or added, or the opening balance was entered wrongly; see a wrong beginning balance on a reconciliation.

Which payroll deposits and reports do I tie out each month?

Tie the payroll report for the month to the payroll expense and payroll liability in the books, and to the tax deposits made. Federal payroll taxes are deposited electronically, and the schedule depends on past liability (IRS). A deposit follows the date wages are paid, not the date the books record the liability (Publication 15). With no employees, skip this section.

A monthly depositor that reaches $100,000 becomes a semiweekly depositor for at least the rest of that year and the next. An employer whose Form 941 tax for the current or prior quarter is under $2,500, with no next-day deposit obligation in the current quarter, may pay with a timely Form 941 instead of depositing (Publication 15); its liability then clears when that payment is made.

For Form 941 filers, the lookback period is the 12 months from July 1 two years before the deposit year through June 30 of the year before it (Table 1 in Publication 15), and the schedule is set once for the calendar year. The tie-out each month:

• Gross wages on the payroll report equal the wages expense in the books; on accrual books, add wages earned but not yet paid.
• Withheld taxes and employer taxes on the report equal the payroll tax liability the books show as owed.
• Each deposit, with its confirmation number, reduces that liability. That holds for deposits a payroll provider makes, because an employer who outsources payroll generally stays responsible for the taxes (Publication 15). After a deposit, the liability for the deposited payments is zero. A balance that will not clear means a missed deposit or a deposit booked as an expense; see payroll liabilities that won't clear.
• At quarter end, the three months of payroll reports agree with Form 941, which is due the last day of the first month after each quarter. The IRS allows 10 more calendar days when every deposit was made on time. An employer the IRS has told to file Form 944 reports once a year instead. For Form 940 and federal unemployment tax, see running payroll yourself.
• A business may need state or local tax IDs for payroll (SBA); see employees in another state.

A late deposit can draw a penalty of 2% to 15% of the unpaid amount, though reasonable cause may remove or reduce it (IRS). An owner or other responsible person who willfully fails to pay over withheld tax can be personally liable under section 6672 for 100% of the unpaid withheld tax, and that can include an accountant or anyone who signs checks for the business (Publication 15). The IRS generally has 3 years from April 15 of the following year, or from a later filing date, to assess it (IRM 5.7.3). See the trust fund recovery penalty. If a deposit or return was missed, see behind on payroll taxes.

What do I check on receivables, bills, loans and sales tax?

Each of these balances on the balance sheet should match an outside list: customer invoices, vendor bills, lender statements or sales tax returns. Which ones apply depends on the accounting method. Under an accrual method, income is generally reported in the year earned and expenses in the year incurred; under the cash method, expenses are generally deducted when paid (Publication 538). A cash-method business ties out unpaid invoices and bills only if its books track them; to choose between the methods, see cash or accrual for a small business.

• Receivables. The list of unpaid customer invoices totals the receivables balance. A payment deposited but never applied to an invoice is the usual cause of a mismatch.
• Bills. The list of unpaid vendor bills totals the payables balance. On an accrual basis, enter bills that arrive after month-end for costs incurred in the month.
• Loans. Money borrowed through a bona fide loan is not income, and a business can generally deduct interest on debt related to the business (Publication 334). Split each payment between interest and the part that lowers the balance, and agree the balance to the lender's statement. For the entries, see recording a business loan.
• Sales tax. Sales tax imposed on the buyer, which the business must collect and pay over, is not income. A tax imposed on the business as the seller is different: the amount collected goes in gross receipts (Publication 334). States word their taxes differently, so check which kind yours is. Either way, keep the tax owed as a liability until the return is filed and paid. Also list purchases on which no sales tax was charged, because use tax may be owed on them; see use tax on business purchases. The tax collected is held for the state, and in New York certain owners, officers, partners and members can be personally liable for tax the business owes (Publication 750). See sales tax journal entries and sales tax payable does not match the return.

Each state sets its own filing schedule. For example, California and New York both require a return for a period with no sales. See filing sales tax returns.

How do I handle owner draws, contributions and personal charges?

Record every dollar that moves between the owner and the business as its own kind of entry, never as business income or an expense by default. The IRS advises keeping the business account separate from the personal account and for business only, and identifying each deposit as business income, personal funds or a loan. Its worked example notes that a personal expense paid from the business account would still be recorded, even though it could not be deducted (Publication 583).

Money an owner puts in is recorded as a contribution or a loan, never as sales. Which one it is depends on the agreement and the facts; see contribution or loan to your LLC and shareholder loans to an S corporation. A bona fide loan is not income (Publication 334), and Publication 583 says to identify the source of receipts so that business and nonbusiness receipts, and taxable and nontaxable income, stay apart.

Each month, read the statements for personal charges and move them out of expenses to the owner's account. For a sole proprietor or partner, that is the draw or distribution account. For a corporation, whether a personal charge is a distribution, wages or a loan to the owner depends on the facts; see an S corporation paying personal expenses and borrowing from your own corporation. For the entries and the other traps, see recording owner's draws, guaranteed payments and partner draws and fixing mixed business and personal funds.

Which reports do I review, and what looks wrong?

A profit and loss statement shows income and expenses for a period; a balance sheet shows assets, liabilities and equity on a date (Publication 583). After the reconciliations, read both against last month, line by line. These are working checks, not IRS rules.

For a statement that still looks off, see why a profit and loss statement looks wrong; for leftover uncategorized items, uncategorized expenses before tax time. The investor and board package is in monthly financials for investors and the board.

Which estimated tax payments and due dates fall in the month?

Owners and corporations pay estimated tax on a calendar of their own. Individuals, including sole proprietors, partners and S corporation shareholders, generally pay when they expect to owe $1,000 or more at filing; corporations generally pay when they expect $500 or more (IRS). A date that falls on a weekend or holiday moves to the next business day. How much to pay, and what a missed payment costs: see quarterly estimated tax payments.

A sole proprietor's federal estimated tax is the owner's personal tax, and the IRS says not to deduct federal income tax (Publication 334), so a payment from the business account is generally recorded as a draw, not an expense. A partner's payment is also personal tax, so it is generally a distribution to that partner. When an S corporation pays a shareholder's tax, it may be a distribution, a loan or wages, depending on the facts; see S corporation estimated tax payments. A C corporation pays its own tax, which is not a distribution to its owners. A tax a partnership or S corporation owes itself is its own, not a distribution: an S corporation's federal estimates for built-in gains, excess net passive income or investment credit recapture tax, due on the corporate dates (Form 1120-S instructions), and a state entity-level tax such as an elected pass-through entity tax.

Other dates that depend on the books: payroll deposits and Form 941 (above), sales tax returns on each state's schedule, and any lender or investor report on the date the agreement sets.

Is there a deadline for the month-end close, and how do I streamline it?

No federal tax rule sets a close date. The IRS says that, except in a few cases, the law does not require any specific kind of record, only a system that clearly shows income and expenses (Publication 583), and it advises monthly reconciliation of the checking account. The deadlines that matter come from the dates above.

Close by the first date anyone relies on the numbers:

• Payroll tie-out before the deposit date.
• Profit figures before an estimated tax payment.
• Sales tax figures before each state return.
• The books before a lender's or investor's reporting date.

Closing before the last statement arrives is a trap: the month is final only after every statement is in. These working habits, not rules, speed a close without cutting steps: use the same checklist every month, give each step one owner, reconcile when statements post instead of at quarter end, and collect payroll reports on payday. A startup with investors may need to close before each board meeting; the package itself is on the investor monthly page. The year-end version is the year-end close checklist.

Example

These examples are illustrative and use US dollars.

A cafe LLC with six staff and $80,000 of monthly sales

All sales are by card. The register report shows $80,000 of March sales plus $5,000 of sales tax collected. The card processor deposited $82,600 and kept $2,400 of fees, so deposits plus fees equal sales plus sales tax. The $5,000 stays in sales tax payable until the return is paid. The bank reconciliation is off by $4,000: the March rent check cleared but was never entered. After the entry, the statement and the books agree, and the profit and loss statement shows rent for the month.

March payroll taxes total $4,000. The cafe's taxes in its lookback period were $50,000 or less, so it is a monthly depositor and deposits them by April 15. The March 31 balance sheet shows a $4,000 payroll liability, and after the deposit the March liability is zero.

A freelance consultant with $12,000 of monthly income

The consultant is a sole proprietor, and the May close is short. The consultant reconciles the one business checking account, categorizes the month's deposits and expenses, and records the $5,000 moved to a personal account as an owner draw, not an expense. A business savings account receives $3,000 for estimated tax; that move is a transfer, not an expense. When the next payment is due (June 15), paying it from that account is a draw.

A startup C corporation spending $50,000 a month

The startup keeps accrual books, and the board meets on the 20th, so the close runs in the first week. Cash paid out in the month is $44,000, but $6,000 of vendor bills for the month arrived unpaid. The close enters them, so the profit and loss statement shows $50,000 of spending. The board package is built from those closed books.

Different for you?

• Reports arrive late or look wrong, a reconciliation will not reach zero, or nobody owns the monthly routine: see a wrong beginning balance on a reconciliation and bookkeeping help.
• The books are already months behind: see catching up on overdue books and bookkeeping help.
• A lender or investor wants closed books by a set date each month: see monthly financials for investors and the board and bookkeeping help.
• A payroll deposit or return was missed, a payroll provider missed one, or an IRS payroll notice arrived: see behind on payroll taxes and a payroll provider that did not pay your taxes.
• Sales tax accounts in several states: see filing sales tax returns, tracking sales by state and bookkeeping help.
• You own an S corporation: see S corporation bookkeeping and bookkeeping help.
• Personal and business money are mixed: see fixing mixed business and personal funds and bookkeeping help.
• A non-US person owns your LLC or corporation, or funds it from abroad: see bookkeeping for a foreign-owned US company and bookkeeping help.
• Deciding who keeps the books, or checking the person who does: see doing your own books or hiring a bookkeeper, what a bookkeeper costs per month, checking your bookkeeper's work and bookkeeping help.