Monthly Closing, How & Why?

When the whole world Is moving in the direction of closing the accounting books within 10 days of next month , Indian corporates are finding it difficult to do a quarterly closing. And even if it is done, results could hardly be relied upon for medium sized companies.

      Although monthly closing seems draconian from the point of view of accountant , it is a necessity in a fast phased world of today. To understand the benefits of monthly closing and how it could be implemented we need to understand few key points . And the first among them is 'Why do we need to close the books before we are statutorily required to do so ?' And this is one of the prime questions of the Indian corporates.

      Statutorily we are required to close the books yearly and calculate our profit/losses for the year and also present the same to Government of India in order to asses them and pay our taxes. If however you are listed this exercise needs to be done quarterly. So why should anyone do this massive exercise monthly. The reason is same as for the Government , to 'Asses.'

     In the beginning of the year we all have targets for our organizations , as to how much sales are we going to achieve; what will be our cost of production/service ;what will be our EBITA . If your organisation is chasing a target then it is moving from here (today) to there(Target) on a path which is not predefined i.e you are certain that what is your destination but you are not so sure about the path as there could be many.

    Now let's take an analogy you are going on a vacation to an old monument and let's say you are driving at 60 Km an hour. What if you miss the turn of that monument and realize it on a next turn . "That’s not so bad" you'vd say "I will just take a U turn". Now what if you realize it after 30 Minutes of driving. You are in big trouble now , you have to travel 30 Kilometres back to be on course again. But wait till you realize this that you have moved 30 Km earlier in wrong direction so you have cumulatively made a mistake of not 30 Km but 60 Km.

    I made two points here First being 'That it's easier to correct the mistake if you realize it earlier' second is 'It takes twice the effort to correct the mistake'.

  The same goes for closing the books of accounts, three month is a long time to correct our mistake. Its far easier to be take corrective measure if something has just happened last month rather than 3 months back or half year back.

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By CA Shashank Chaudhary