The purpose of this section is to discuss the fiscal period close and inventory close. By fiscal period, i am referring to month end closing and well as year end closing.
Before i begin to explain the closing process, let me explain the closing process in general.
Companies in general close their books monthly so that the financial result of that particular month can be ascertained. This is a multi-step process and generally a check list is maintained by the concerned department to perform closing.
Month end closing is different from fiscal closing as it is for one month. We can say that the fiscal is closed when all the months are closed. However, fiscal close involves opening balance migration through opening transaction to new year.
Now let’s look at the month end close activity in detail.
During month end, following are the steps which are followed in general:
1. Posting Accrual entries.
2. AP invoicing and payment activities closure.
3. AR invoicing generation and payment receipt
4. General ledger Adjustment entries
5. Tax settlement
6. Depreciation of assets posting.
7. Bank account reconciliation
8. Inventory closing
Please note that the above mentioned steps can be optional or mandatory depending on business. We don’t run fiscal close batch job for month end.
It is recommended to post all the entries and and put the fiscal period on hold. To put the period on hold, click on Ledgers in General ledger setup section. Click on Ledger calendar. Select the appropriate period and put the Period status as On Hold. We can put the status as Closed also but the important point here is that once the status is set as closed, it can’t be re-opened. It is suggested not to put the status as closed as their are higher chances that some expenses or adjustment entries may be posted later in year.
For the month end activity, certain companies follow approach were they perform month end systematically. For example, Accounts payable may be closed first then AR and lastly GL. When AP is closed then AR and GL transactions should be posted. In that case, we can’t put the period status On Hold as it will stop all the modules. For situation like this, we can use the Module Access Level restriction. On the ledger calendar itself, there is module access level. If we set module access level as None for Sales order and Customer, then user won’t be able to post Sales order invoice or payment entry, but other modules transaction will be continued. Similarly, we could also put access level at user Group and the users in that group could only post transactions. Following screenshot describes the process:
From inventory perspective, we could either run inventory close or recalculation. The recommended option is to run close rather recalculation as this will give more realistic value. The issue with inventory close is that the closed period will not allow any inventory transaction in closed period and the advantage of monthly inventory close is that the inventory ledger will show more accurate value and the inventory close process will not be over burdened at the year end.
If we perform month end closing correctly, then the fiscal close will not be a difficult task. Considering the fiscal year is from January to December, then December which is the last month of the fiscal, month end activity should also be performed. Since month end will include inventory close also, we will be running the Opening transaction job for migrating opening balance to next year. Please note at the year end, before running the opening transaction job, it is suggested to take the print of trial balance and other financial statement and verify data for accuracy. After the data is verified, you are good to go with opening balance job.
However, before running the opening balance job, we need to take care of the GL parameter setup related to closing: There are 4 check boxes and they are really important:
In General ledger, setup, click on Parameters and expand fiscal year close tab.
Following are the details of check boxes:
1. Delete close of year transaction during transfer: Opening transaction job can be run more than one time. For example you ran the job, analyzed the trial balance and noticed that there should be one adjustment entry posted. In that case you can post the adjustment entry (if the status is not set to closed) and run the job again. Now when we run the job again, system can post the adjustment entry transaction separately or it can delete the transactions created in last run and create new set of entries. If it is required to run the opening balance job multiple times, it is recommend to check this check-box.
2. Create closing transaction during transfer: When we run closing, system can create two transactions. One the closing transaction on the last day of fiscal and other the Opening transaction on the first day of fiscal. If the check-box is checked then system will create closing transaction on year end date otherwise it will create only opening transaction on the first day of next fiscal. Please note that this has impact on financial reporting. So we should make the decision accordingly.
3. Set fiscal year status as closed: When the opening balance job is complete, it will set the status as closed if checked. It is recommended not to check this. Period status can be set to closed manually also and this should be done after the balance sheet is audited. However, it depends on the client’s requirement.
4. Voucher number must be filled in: This refers to the voucher number on opening transaction job. It is recommended to be checked.
At this stage, we can proceed with opening balance job. Go to General ledger, Periodic, Fiscal year close and then click on Opening transaction.
Note the general ledger parameter as the first thing. We need to enter the fiscal year end date. Select balance accounts as Closing –> Opening. Select the Retained earning account in main account for transfer of year end result and specify the voucher number.
In the financial dimension tab, select the dimensions so that balance will be migrated with dimensions. Click on Ok and the closing process will be done.
Run the financial statements and verify the data. If any adjustment entry is required, post it through general journal and re-run the opening transaction process with a new voucher
Friends, i really didn’t emphasized on Inventory close. I am writing some notes on that below:
Inventory Close: Before we run fiscal close, we should run the inventory close, however, this is not mandatory step for fiscal close. Inventory close is optional. There are certain companies which don’t maintain inventory. For example NBFC (non banking financial companies) or typical service industries don’t maintain inventory in their books. So for this type of industries, inventory close doesn’t make any sense.
Inventory closing process basically matches the inventory issues to it’s receipt as per costing method selected in item model group. Only those receipts are matched which is financially updated.
Following are some important points applicable for inventory closing:
1. Inventory closing is not generally applicable for industries which is into service sector and doesn’t maintain stock. Example can be NBFC (Non banking financial services industry) or an IT company. They generally book inventory as consumption (expense).
2. Inventory closing is not applicable if the inventory is valued at standard cost method. This is because we are valuing our inventory at standard price which can be current market price.
3. Inventory closing process can be run on monthly, quarterly or yearly basis unlike fiscal close which is always run Year end. My view is that we should run the process more frequently.
4. Inventory closing once performed can be cancelled. But this shouldn’t be taken for granted. Closing has lot of implications.
5. Inventory closing is not mandatory to be run before fiscal year close. There is no check in system for this.
6. Inventory recalculation shouldn’t be considered as an alternative to inventory closing. Closing should be performed even if recalculation is performed for each period.
Inventory costing and closing is very very vast and i think it will take me days to write complete inventory closing. I am saying this because there are already many blogs available and they are really good.
My suggestion would be to must go through http://fedotenko.info/?page_id=31. This the best blog i have ever seen and the content is fantastic.
Please let me know if you have any doubts related to inventory or fiscal close. Your comments and suggestions are most welcome.