Business and pressure go hand in hand. While at times pressure can be a great motivator, it can also lead to misguided decision-making, tactical errors, missed deadlines and employee burnout. Traditional accounting teams that wait until just before the end of a financial period to perform the many activities required to “close the books” know this reality all too well. Nowadays, a more efficient approach, called continuous accounting, aims to modernize the process by integrating accounting tasks into the natural flow of daily business. Driven by advances in technology — automation and cloud computing, to name two — continuous accounting gives organizations much-needed transparency into their financial data and performance at any point in the accounting cycle, in real-time. This primer delves into the principles behind continuous accounting, how it works, key benefits and how businesses can make the switch.
What Is Continuous Accounting?
Continuous accounting came as a response to the decades-old paper-based practice of businesses performing the tasks needed to close their books, such as account reconciliation and journal entries, at the end of a financial period. The need to complete critical closing tasks within a tightly compressed timeframe has always put tremendous strain on financial and accounting professionals, and all the more so as a business grows. In addition, business leaders who wanted to know the state of their organizations’ finances in the middle of a cycle could only get a stale, backward look.
Continuous accounting balances the workload throughout an accounting period, using technology to automate many of the daily tasks. In this way, the accounting process transforms from a rear-window-gazing activity into ongoing and transparent analyses of a business’s finances in real-time. By updating the books as transactions occur, continuous accounting shines a light on the current state of the business, leading to more informed decision-making and enabling the accounting team to focus on more strategic work. This development is urgently needed, as accounting closes have otherwise yet to improve significantly despite businesses’ efforts, according to Ventana Research. Ventana’s most recent survey shows that the percentage of organizations able to complete their quarterly closes within six business days has actually shrunk: 43% in 2022 versus 49% in 2019. This is why the shift in accounting practices to continuous accounting is one of the biggest trends affecting the finance function today.
- Continuous accounting modernizes the way accounting and finance teams do their jobs.
- It frees accountants to add more value to the business by spending more time analyzing data and providing insight to business leaders.
- Continuous accounting provides transparency into the financial health of the organization at any time, in real-time.
- Greater business flexibility and agility are also key benefits.
Continuous Accounting Explained
With continuous accounting, work typically performed near the end of an accounting period, such as monthly or quarterly, is completed across the entire time frame. This approach, fueled by the automation of repetitive yet critical tasks, not only helps accounting professionals do their jobs faster and more effectively but also allows financial leaders to access and analyze the most accurate, up-to-date financial data at any given moment.
How It Works
The traditional accounting process, sometimes described as “record-to-report” (R2R), jam-packs an enormous volume of period-end work into a very short time frame. Tasks include creating journal entries, reconciling account statements and managing amortization and depreciation, all of which demand 100% accuracy. But even so, by the time a company closes its books and reports results, the information is already outdated.
Continuous accounting operates on a different philosophy. It’s an ongoing, technology-driven process that spreads the “wealth” of work across the daily workflow. For example, rather than an accounting staffer having to wait until the end of the month for a formal bank statement to arrive and then checking to see that it matches the cash balance recorded in the general ledger, automated accounting software reconciles each transaction as soon as the bank updates its records. It also automatically updates various subledgers and the general ledger.
Here’s a behind-the-scenes example of continuous accounting in practice. Let’s say ABC Design Company needs a specific type of ink to complete a printing job. The procurement department finds an office supply vendor that can provide sufficient volume, but the vendor demands payment upon receipt due to the scarcity of the product. ABC Design immediately pays with a $3,500 ACH transfer, executed through its payment management software, which automatically captures the amount, the data and the metadata about the payment’s purpose. As soon as the bank processes and posts the transaction, ABC Design’s software automatically reconciles the $3,500 payment with the $3,500 expense and instantly posts the transaction to the general ledger in real-time.
Under the R2R framework, transactions like this one would not have reached the general ledger until the end of the period when the accounts payable subledger is uploaded to the general ledger. Even then it would have required manual intervention to get it there.
Three Main Principles of Continuous Accounting
Continuous accounting is synonymous with the term “continuous close”, which means that a business can informally close its books at any moment because its financial data is updated and accessible in real-time. Continuous accounting is based on three foundational principles:
Automate repetitive processes. Continuous accounting relies on automation to take over rote accounting work. Note that automation is intended not to replace bookkeepers and accountants but to handle the repetitive tasks that burden accounting and finance teams, freeing up their time so they can focus on the integrity and accuracy of outcomes. Benefits of automating repetitive tasks include elimination of the inevitable human errors in manual work, faster turnaround times and happier employees. A few of the repetitive period-end accounting processes that are ripe for automating in real-time include reconciling cash transactions to bank statements, matching payments received from customers to accounts receivable balances, coding accounts payable invoices to the correct general ledger expense account and matching open purchase orders to supplier invoices for accounts payable purposes.
Optimize the accounting calendar. Continuous accounting balances the workload across an entire accounting period so it becomes part of a team’s day-to-day activities. A steadier workflow helps to minimize employee stress, reduce or eliminate errors made in haste and improve overall productivity. Transactions like journal entries, allocations and reconciliations are not done in a “batch” at the end of a period, but instead are performed in real-time, making organizational leaders privy to the most up-to-date information about the business. As a result, they make better decisions — both tactical and strategic — that are based on a more realistic understanding of the financial status quo. Continuous accounting also helps catch errors or fraud earlier, reducing potential loss and improving internal controls.
Create culture of continuous improvement. Continuous accounting requires a top-down commitment to a culture of continuous improvement that is guided by constant observation and analysis. Before an accounting organization can practice continuous improvement, CFOs and other finance leaders must proactively promote the benefits of agility. Simplified workloads, greater personal efficiency and productivity, reduced grunt work and less overtime and weekend labor at closings are all ways that practicing continuous improvement can persuade workers to view a cultural change positively.
Two Types of Ledgers in Continuous Accounting
Accounting teams that practice continuous accounting depend on two types of ledgers: general ledgers and subledgers, both of which would be automatically updated throughout an accounting period.
General ledger: The general ledger is the organization’s “single source of truth”, containing a record of every financial transaction. Organized by accounts, the general ledger possesses all balances in the chart of accounts and is the ultimate reference for understanding a business’s financial status.
Subledgers: A general ledger can be broken down into subsidiary ledgers, or subledgers. Subledgers store more granular transaction data within individual accounts and feed into the general ledger.
Benefits of Continuous Accounting
Without a doubt, organizations can reap numerous benefits from continuous accounting, realized by automating account reconciliations, transaction matching, variance analysis and other accounting tasks in real-time. Here are some of the most significant advantages:
Enhanced business agility: A faster, more transparent, intelligent accounting process can deliver more accurate and actionable information to business leaders on demand. By basing decisions on real-time knowledge of their organization’s financial status, executives are able to respond more quickly and flexibly to changes in the market, like recessions.
Transforming accounting into a competitive asset: The accounting function has long been a cost center for organizations, sometimes characterized as a reactive gatekeeper of critical financial information. Continuous accounting empowers accounting and finance teams to spend more time as proactive business advisers, using time freed by the automation of mundane tasks to perform more in-depth analyses and forecasting that can drive the business forward.
Minimized risk: Manual accounting processes are subject to human errors. Pressure to close rapidly at the end of a financial period can result in rushed, premature approvals and late or inaccurate journal entries. Continuous accounting significantly diminishes these problems. Discrepancies can be discovered earlier, before closing, and key performance indicators (KPIs) can be monitored continuously, enabling business leaders to spot worrying trends and take proactive steps. By catching errors or potential fraud sooner, businesses can shrink losses while improving internal compliance controls.
Reduced employee turnover: Accountants didn’t train for years to spend long hours manually keystroking data or pushing the button on rote spreadsheet calculations — the hallmarks of R2R accounting. This is a quick path to dissatisfaction and burnout. Continuous accounting balances their workload, automates rote tasks and enables them to spend more time discovering ways to add value to the business. The business itself benefits from their expertise and from reducing turnover of employees who are difficult and expensive to replace in today’s tight labor markets.
Improved business integrity: The financial close and reporting function is exceedingly complex. Manually closing out subledgers and creating and delivering financial filings to regulatory bodies, among other requirements, involves numerous individuals, departments, systems and high-level stakeholders. Errors abound that, if not caught, can steer the business in the wrong direction or manifest in embarrassing inaccuracies. Streamlining with continuous accounting software can minimize errors and ensure the integrity of the business.
Better operational efficiency: Eliminating the uneven, feast-or-famine workflow patterns that come with traditional R2R accounting models increases the accounting team’s operational efficiency and can raise the productivity of accountants, too. It can free up time to spot newfound opportunities for revenue expansion or cost savings. And the capability to evaluate data integrity at any point in the finance life cycle also allows for continuous monitoring for errors, fraud and inefficiencies, which may potentially reduce costs.
Detecting fraud more easily: Fraud is the “purposeful manipulation of accounting information”, and it is both unethical and illegal. Any schemes to deliberately misstate or omit information in financial statements not only cost a business money, due to the fraud itself, but can throw off financial reporting, affecting critical business decisions that are based on the reported data. Of the three types of occupational (workplace) fraud, misappropriation of assets is the most common. Of the types of fraud involving specifically cash as opposed to misappropriation of other assets, fraudulent disbursements are the most common. One of the most common types of fraud is accounts payable fraud, which involves fraudulent disbursements — typically, billing schemes, check tampering and expense-reimbursement ploys. Fraudulent actions can be more easily spotted with a continuous close. If there was any unscrupulous activity, like a hidden purchase requisition, it would be rapidly traced.
Streamlined tax filings: All businesses file tax returns annually. To do this, they need to assemble all their data and justify every penny that has moved through their systems throughout the year. Continuous accounting increases the efficiency and accuracy of that process, reducing preparation costs while ensuring yearlong access to accurate and timely data for tax-planning purposes.
Embrace the Future of Accounting Today
Limitations of Continuous Accounting
Despite all the value it delivers to businesses, continuous accounting has its limitations — and challenges. Chief among them:
Running into resistance from accounting and finance teams. Changing processes, much less organizational culture, is always difficult. The R2R accounting methodology has been standard since, at least, the last century. A reluctance to adapt should be taken seriously, and change must be proactively managed.
Legacy systems not playing well with new continuous accounting software and processes. Legacy accounting software was designed for a different accounting era. As a result, legacy solutions have difficulty adapting to continuous accounting frameworks whose books are continually updated. It is also challenging to integrate older, proprietary, on-premises technologies with solutions from other vendors. Many organizations thus have a lot of “technical debt” buried in their accounting departments. One way to solve this is with a modern, cloud-based solution designed to work seamlessly with other software, which would facilitate the ability to switch to continuous accounting.
Problems accounting for traditional monthly expenses. Traditionally, most business expenses have been calculated and posted to the general ledger on a monthly basis because they require manual intervention — especially when adjusting entries like payroll accruals, provisions and prepayments, as well as non-cash expenses like depreciation and amortization. To get the most benefit from continuous accounting, organizations should make sure their continuous accounting software is sophisticated enough to calculate and make daily accruals for these expenses, which can then be settled by the end of the month. This may require reworking certain processes or policies, such as adjusting payroll period cutoffs.
Continuous Accounting's Benefits & Challenges
Advantages of Continuous Accounting
Challenges of Continuous Accounting
How to Switch to Continuous Accounting
Shifting from R2R to continuous accounting is not just a matter of embracing new technology. Organizations must reenvision their processes and reinvent the way their finance and accounting teams work. Here are some steps to take to make the switch.
Step 1: Evaluate the current state of the accounting cycle. Take a deep look at the current closing process. How long does it typically take to close the books at the end of the cycle? How often do accountants or finance professionals have to go back after closing to fix errors? What are their other big pain points and bottlenecks? Make sure to involve the team members themselves to identify how gaps in visibility, efficiency and integration are creating potentially risky accounting scenarios.
Step 2: Envision the future state. Map out an ideal accounting process for the organization, using continuous accounting precepts as the foundation for the vision. What should be automated? What should stay in human hands? What’s the flow of data from one system to another? What’s the ideal daily workload for employees?
Step 3: Divide all period-end accounting processes into smaller, simpler tasks. Take everything that was previously executed in batch mode at the end of a month, quarter or year, and break each task down into smaller tasks arranged in a logical order.
Step 4: Distribute tasks throughout the cycle’s daily workflow. Arrange those tasks for which a logical workflow was previously created into a day-by-day schedule, embedding them into existing business processes whenever possible. The goal: to make these tasks a regular part of the accounting team’s days.
Step 5: Automate rote, repetitive tasks. Make as many processes fit a standard template as possible, and automate wherever it makes sense. For those processes that require human capabilities, such as nuanced judgment or estimation, try to standardize them, as well.
Step 6: Monitor and continuously improve processes: Keep an eye on KPIs, such as days to close, and monitor data and outcomes to catch any problems with processes, anomalies and discrepancies before closing the books at the end of the cycle. Fix any issues as they’re identified, and adjust processes to avoid similar ones in the future. Always be mindful of how the process could be more efficient. Note that this kind of incremental, iterative progress is an essential aspect of a culture of continuous improvement.
Step 7: Review big picture outcomes regularly: Every year, at a minimum, analyze the overall impact that continuous accounting is making on the organization. Compare the outcomes against the original vision. What worked? What didn’t? Learn and revise your continuous accounting strategy for the next year accordingly.
Origins of Continuous Accounting
Many accounting practices in use today are based on centuries-old processes. Over the thousands of years since early evidence of accounting was found in Mesopotamia, the accounting profession has advanced through double-entry bookkeeping, the adding machine, VisiCalc, Excel and, now, specialized accounting software that runs in the cloud.
Amid these changes, a notable model for modern accounting emerged early last century: the record-to-report model. R2R treats activities in an accounting period as elements in a repeating process that initiates when the first transaction of the cycle is booked and ends when financial statements are released. Legacy software was developed to support R2R processes.
Continuous accounting emerged at approximately the same time as new, flexible, modular and easily integrated cloud technologies. That was the technology needed to support what the Harvard Business Review in 2001 called the “virtual close,” or the ability for businesses to get an up-to-the-minute view of their financial health at any point in the accounting cycle, not just at the end. Today, many companies are exploring continuous accounting precepts to eliminate the arduous and stressful post-period close in favor of continuous accounting’s ability to offer real-time financial insight to business and finance leaders.
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With continuous accounting, businesses don’t wait until near the end of an accounting period to start the process of closing their books. Rather, this modern accounting approach — empowered by cloud-based technology, such as NetSuite Cloud Accounting Software — automates many of accounting’s rote tasks as soon as they’re ready to be completed. This results in a faster, more accurate closing process, eliminating the human errors that arise from manual data entry and integration. Another benefit: Accounting and finance professionals have time to focus on more valuable work, such as analyzing trends, investigating anomalies and performing strategic advisory work that will benefit the overall organization’s competitive stance. In addition, real-time financial reports can be pulled on the fly so that the organization is guided by the most up-to-date information, assured that it’s in compliance with appropriate accounting standards.
Accounting and finance teams don’t want to spend their working hours toiling over rote repetitive tasks. Neither do they want all-important financial closings condensed into a stressful race against the clock at the end of an accounting period. And finance teams, as well as business leaders, need more than monthly or quarterly reports on the organization’s financial health — they want transparency into the financial status of the organization at any time. Continuous accounting promises to address these issues. By using advances in automation and integration technologies to break up and evenly distribute the accounting tasks that used to be put off until the end of the period, continuous accounting is a giant step beyond traditional R2R accounting methodologies. Continuous accounting makes it possible for valued accounting and finance professionals to focus on the activities that will drive the business forward while improving competitiveness and reducing employee churn.
Continuous Accounting FAQs
What is continuous close in accounting?
Continuous close is a synonym for continuous accounting, an accounting process that depends on automation and integration to distribute accounting tasks throughout a reporting period. The goal is to keep an organization’s books always up to date, rather than waiting until the end of the period to close them. This way, ad hoc queries about accounting KPIs or financial results can be made at any time, in real-time.
What is a continuous financial management process?
Financial management is the process in which finance professionals and leaders review and analyze business results, and devise strategies and make plans to strengthen them. Alternatively, a continuous financial management process would involve more ad hoc meetings, analyses and on-the-fly decisions to improve the success of the financial strategies that are already in play. This enables greater organizational flexibility and agility when responding to events and trends in the modern, always-on business environment.
What are the different ledgers used in continuous accounting?
Accounting teams practicing continuous accounting depend on two types of ledgers: general ledgers and subledgers. The general ledger is the organization’s centralized repository for all accounts and is used as the statement of record for its financial status. Subledgers record transactions for individual accounts and store more details about individual transactions.
What is a continuous process in accounting?
A continuous process is one that performs a constant flow or sequence of activities by doing the same thing repeatedly for extended periods of time. In accounting, this would refer to any aspect of booking, reconciliation, depreciation, amortization or other tasks that are automated to be repeated throughout an accounting cycle to make it possible to close the books.
What is a constant accounting?
While constant accounting may sound like it’s synonymous with continuous accounting, it’s not. Constant dollar accounting is a methodology for adjusting current dollar figures to reflect inflation. Continuous accounting is an accounting process that depends on automation and integration to distribute accounting tasks throughout a reporting period.
Can you fully automate accounting?
Not yet, although many aspects of it — especially repetitive tasks like expense management, payroll and bank reconciliation — are ripe for automation. Additional functions, including accounts receivable, accounts payable and tax accounting, can be largely automated, but they still need a human in the loop to look at outlier numbers or results. Even as artificial intelligence (AI) gets smarter and can handle more nuanced aspects of the accountant’s job, human qualities like creativity, intuition, insight and judgment will still be valued.