Month-end close for distributors

A distributor's close is mostly an inventory close. Goods move in and out every hour and vendor invoices lag receipts. Rebates and freight are earned in one month and billed in another. This checklist follows the order we use, because each step depends on the ones before it.

It is written for U.S. GAAP reporters. We name the FASB Codification topics that apply so you can read them yourself, and we recommend confirming any accounting policy with your accountant or auditor.

The close at a glance

Order	Step	Why here
1	Cut off shipping and receiving	Defines which transactions belong to the month
2	Receipts not yet invoiced	Puts received goods and their liability in the same month
3	Inventory reconciliation	Needs final receipts and shipments
4	Freight and landed cost accruals	Adjusts inventory and cost of goods sold for unbilled costs
5	Vendor rebate accruals	Reduces inventory cost and cost of goods sold for rebates earned
6	Customer rebates and credits	Reduces revenue for amounts owed back to customers
7	AR aging and allowance	Needs final invoices and credits
8	AP review	Needs final receipts and accruals
9	Sales tax	Needs final invoices and credits
10	Bank reconciliations	Confirms cash, the one balance an outside party can prove
11	Revenue cutoff review	A final check that shipments and invoices match the month
12	Inventory reserves	Needs the reconciled inventory balance
13	KPI and flux review	Catches what the steps above missed

Cut off shipping and receiving

• Set the cutoff time and tell the warehouse. Goods that leave the dock after cutoff ship next month, even if they were picked this month.
• Ship or hold every picked order. A picked order left unconfirmed is inventory that is neither on the shelf nor shipped.
• Post every receipt that is physically on the dock. Goods received but not posted make inventory and the liability both too low.
• Post transfers and confirm what is in transit. Stock between warehouses must sit in an in-transit account so it does not vanish from both.
• Invoice every shipment dated in the month. Shipped but uninvoiced orders understate revenue and AR.

Accrue receipts not yet invoiced

• Run the received-not-invoiced report. Goods you own create a liability even before the vendor bills you.
• Tie the report to the accrual account in the GL. Many ERPs post this accrual automatically at receipt. A difference means manual entries or cost changes need a look.
• Clear stale accruals. Receipts more than a few months old without an invoice are usually mismatched invoices, duplicate receipts or returns never recorded.
• Resolve invoice price and quantity variances. Decide whether each variance belongs in inventory cost or in cost of goods sold, and follow the same rule every month.

Reconcile inventory to the GL

Perpetual inventory is the subledger: the ERP's quantity on hand times cost. The GL inventory account is the control total. The two should match at month end.

• Run the inventory valuation as of the cutoff. Use the same date and time as the GL balance, or timing differences look like errors.
• Compare it to the GL inventory accounts, by location if you can. A difference by location is easier to trace than one company-wide number.
• Explain every difference and fix its cause. A reconciling item that repeats monthly is a setup problem. The table below lists the usual causes.
• Book count adjustments and shrink. Post cycle count and physical count variances in the month they were found. ABC analysis and cycle counting covers the count program.

Common reasons inventory does not tie to the GL

Cause	What it looks like	Where to look
Manual journal entries to inventory	GL moves with no matching subledger transaction	GL detail for entries not posted from the inventory module
Transactions posted after the report ran	Difference disappears when you rerun the valuation	Transaction dates and times near cutoff
Receipt costed at PO price, invoice at a different price	Difference moves with invoice matching	Invoice price variance postings
In-transit transfers	Stock missing from both locations	Transfer and in-transit accounts
Cost changes applied to on-hand stock	Revaluation posted to the subledger but not the GL, or the other way round	Cost change history and revaluation postings
Negative on-hand quantities	Items shipped before receipt, costed at an estimate	Negative on-hand report, then the later receipt cost
Consigned or customer-owned stock	Quantity in the subledger you do not own, or the reverse	Consignment settings and locations
Unit of measure errors	Quantity right in one unit, cost set for another	Items with large value changes after receipt; see Units of measure
GL account mapping	Some locations or product groups post to the wrong inventory account	Posting setup by location and product group
Closed or back-dated periods	Transactions posted into a period after it was reported	Transactions with a posting date earlier than their entry date

Accrue freight and landed cost

• Accrue inbound freight for receipts not yet billed by the carrier. Freight is part of what inventory cost you, and carrier invoices often arrive weeks later. Landed cost and freight terms explains which costs belong in inventory.
• Accrue duty, brokerage and other landed costs on imports. Leaving them out understates inventory and overstates margin until the bills arrive.
• Accrue outbound freight on shipments not yet billed. Outbound freight is a cost of the month the goods shipped.
• True up last month's estimates. Compare accruals to the invoices that arrived and adjust your estimating method if the gap is consistent.

Accrue vendor rebates

Vendor rebates, allowances and other consideration received from a vendor usually reduce the cost of the inventory you bought, not increase revenue. The guidance is in FASB ASC Subtopic 705-20, Cost of Sales and Services: Accounting for Consideration Received from a Vendor. It grew out of EITF Issue 02-16, linked below.

• Estimate rebates earned on this month's purchases. Accrue a receivable when earning the rebate is probable, based on each program's tiers and your purchase forecast.
• Split the rebate between inventory and cost of goods sold. Rebates on goods still on the shelf reduce inventory cost, and rebates on goods sold reduce cost of goods sold.
• Reconcile the rebate receivable to vendor statements. Claims unpaid for months are often disputed or missed, and should be followed up or reserved.
• Separate payments for services. Money a vendor pays for a distinct service you provide, such as co-op advertising with proof of performance, may be accounted for differently. Confirm the treatment with your accountant.

Record customer rebates and credits

Rebates, price protection and other amounts you owe customers are variable consideration under FASB ASC Topic 606, Revenue from Contracts with Customers, and reduce revenue in the period of the sale.

• Accrue customer rebates earned on this month's sales. Waiting until the customer claims them overstates revenue.
• Accrue expected returns. Use your return history to estimate goods sold this month that will come back.
• Issue or accrue pending credit memos. Pricing disputes agreed in the month belong in the month.
• Review ship-and-debit or price protection claims. Where a vendor funds a customer price, record the customer credit and the vendor receivable together.

Review AR and the allowance

• Run the AR aging and tie it to the GL. Differences mean manual entries or unapplied transactions.
• Apply unapplied cash and credits. They make accounts look more past due than they are.
• Review the largest past-due accounts with credit. Decide whether each is a timing issue, a dispute or a collection risk.
• Update the allowance for credit losses. Base it on aging, history and known problem accounts, and document the method so it is applied the same way each month.

Review AP

• Run the AP aging and tie it to the GL. As with AR, the subledger and control account must agree.
• Check for duplicate invoices. Same vendor, amount and date, or near-matching invoice numbers, are the common signs.
• Clear old debit balances. Vendor credits you never took are cash you are owed.
• Accrue services and expenses received but not billed. Utilities, contract labor and professional fees belong in the month you used them.

Reconcile sales tax

• Tie tax collected to the tax liability accounts. Differences often come from credit memos or invoice edits after posting.
• Review exemption certificates on file. Without a valid certificate on file, an exempt sale can leave you owing the tax.
• Check economic nexus thresholds by state. Since the Supreme Court decision in South Dakota v. Wayfair (2018), states can require sellers without a physical presence to collect tax once sales pass a threshold. The Streamlined Sales Tax Governing Board site is a starting point for member-state rules.
• Prepare filings and the payment schedule. Each state sets its own filing frequency and due dates.

Reconcile bank accounts

• Reconcile every bank and credit card account. Cash is the one balance a third party can confirm, so it catches posting errors elsewhere.
• Investigate old outstanding items. Checks outstanding for months may need to be voided or reported as unclaimed property.
• Record bank fees, interest and merchant fees. They sit on the statement and nowhere else.

Review revenue cutoff

• Compare the last days' shipping records to invoices. Every shipment through the cutoff time is invoiced in the month, and nothing after it is.
• Check shipping terms on large orders near month end. Under Topic 606 revenue follows transfer of control, and shipping terms such as FOB destination can move it into the next month.
• Review bill-and-hold and drop-ship orders. Both separate the invoice from the physical movement of goods and deserve a second look.

Set inventory reserves

Under FASB ASC Topic 330, Inventory, stock measured at FIFO or average cost is carried at the lower of cost and net realizable value (ASU 2015-11). Slow, obsolete and damaged stock is where that test bites.

• Run an aging or excess report by item. Stock with no sales in 12 months, or more than a set number of months on hand, is a candidate for a reserve.
• Apply a documented reserve method. A consistent method, such as a percentage by age band, is easier to audit and to explain than item-by-item judgment each month.
• Review items with a selling price below cost. They need to be written down, whatever their age.
• Record scrap and return-to-vendor decisions. Stock you have decided to dispose of should leave the books when you make the decision.

Review KPIs and the financials

1. Compare the balance sheet and income statement with last month and last year. Any line that moved more than your threshold gets a written explanation.

2. Check gross margin by product group and location. A sudden margin change is usually a cost, rebate or pricing error, not a change in the business.

3. Check inventory turns, days sales outstanding and days payable outstanding. Inventory turns and GMROI and The cash conversion cycle define them.

4. Confirm all reconciliations are prepared and reviewed. A reviewer other than the preparer signs each one.

5. Close the period in the ERP. Closing blocks late postings that would change the numbers you just reported.

Tip

Keep a close calendar with an owner and a due day for every item above. As a rule of thumb, many distributors aim to close in 5 to 10 working days, though it depends on size and staffing. The steps that slip are almost always the receipt, rebate and freight accruals, because they depend on paperwork from outside the company.