Soft close definition
/What is a Soft Close?
A soft close is defined as closing the books using an abbreviated closing procedure. By using a soft close, the accounting department can issue financial statements very quickly and then return to its normal day-to-day activities. Steps that are commonly skipped during a soft close include:
Revenue accruals
Expense accruals
Reserve account updates
The key remaining steps still needed for a soft close are:
Customer billings
Commission accruals
Investigating inventory irregularities (if the inventory balance is large)
Error-checking the financial statements
If the results of a business are particularly susceptible to any item that has been removed from the soft close checklist, then by all means add it back in. For example, if the wage accrual is a large one, consider calculating and accruing it every month, irrespective of the type of close that the organization uses. Doing so requires more time, but results in more accurate financial statements.
Advantages of a Soft Close
It may be perfectly acceptable to use the soft close for internal management reporting, where total accuracy is not entirely necessary. By obtaining the financial statements early, managers can take action on any items requiring correction, thereby improving the performance and overall responsiveness of the organization.
Disadvantages of a Soft Close
The enhanced closing speed of a soft close comes at a cost, for the accuracy of the financial statements is reduced by the various revenue and expense accruals that are normally included in a more comprehensive close. This means that the results reported through a soft close can be materially inaccurate. Or, they may have more variable results from month to month because accruals are not being used to smooth out reported results over multiple reporting periods. The reduced accuracy level makes the soft close impractical for reviewed or audited financial statements that are read by outsiders.
Thus, a reasonable compromise is to use a more thorough closing process whenever a complete set of financial statements is needed for the use of outsiders (such as at year-end), and the soft close for all other months.
Related AccountingTools Courses
When to Use a Soft Close
The financial statements of a publicly-held company are the most rigorously examined, with reviews at the end of three quarters and a full audit at the end of the year. This means that a soft close can still be used for the other eight months of the year. Thus, even a public company can take advantage of a soft close two-thirds of the time.
Related Articles
Accounts That are Closed at Year End