11. Daily Closings

Let’s consider the idea of closing the general ledger on a daily basis. I propose this idea as a thought experiment only, intended to open minds to new ideas and perhaps provoke further discussion. This is not suggested as the optimal solution on maximizing financial information available to corporate decision-makers

The closing of the books involves summing up the so-called “temporary accounts” (revenue, expense, and dividend accounts) and transferring their balances to the retained earnings account. This is typically done at the end of a business period, allowing the bookkeeper to determine the earnings for the period and leaving these temporary accounts with a zero balance to begin the next period accumulating new earnings data.

Since most corporations use the closing operations to prepare their income statement and other periodic reports, the closing operations determines the reporting period. Valid reports are only available after the period’s closing operations and the only reported metrics available are for the period itself. It is hard to imagine how important financial information is reported in such a limited and rigid manner in today’s age of automation, but the method was designed in the middle ages when addition was done with beads and the practice has been dogmatically accepted as necessary regardless of the mounting evidence of its archaic absurdity.

If we choose to continue the process of closing the books before preparing the reports, let us now consider amplifying the amount of information available and increasing its timeliness by closing the books every day and then producing earnings reports for each day.

Since we are working with computers, the closing operations can be easily automated to kick-in at midnight each day and run at little or no cost to the company to summarize the day’s activity. This means that every day the people who run the company could have daily earnings statements as well as more detailed reports on specific types of revenues and expenses. The effects of marketing plans, weekend sales, and work interruptions could be easily gauged just as they happen, allowing the alert helmsman to adapt his company by quickly making necessary corrections and adjustments.

But, if the temporary accounts begin each day with a zero balance, how would a company ever be able to produce a quarterly earnings report? Simple, the earnings for one week is the sum of the earnings for each day of that week; the earnings for a given month is the sum of the earnings for each of its days; and the earnings for a quarter can easily be produced by summing the appropriate daily reports.

Therefore, there is no reason why account closing must await the end of a fiscal period. For the company unwilling to forego the whole wasteful process of closing the books, the process of doing daily closes is a simple way of freeing financial information from the limitations of a rigid fiscal period.