Why review variances at all
Most bookkeeping errors show up as a strange number: a utility bill that doubled, a revenue line that dropped to zero, a category that suddenly holds a vendor it never held before. A review catches these before they reach a report you hand someone.
The same review shows real changes, such as a price increase that is paying off. Both kinds of change need an explanation.
Choose thresholds so you look at what matters
Looking at every line wastes time. Set two thresholds, a percentage and a dollar amount, and flag a line only when it passes both. A 60 percent jump on a $20 line is noise. A 15 percent change on a $20,000 line is not.
The thresholds belong to you. Start with something reasonable for your size and adjust after a couple of months.
Ask the same four questions of each flagged line
Is it timing? A bill paid early or late moves cost between months without changing the year. Is it a one-time item? A repair, an annual fee or a refund. Is it a real change, such as a new customer or a price change? Or is it an error, such as a duplicate or a wrong category?
Write the answer in one sentence next to the line. If you cannot answer, look at the transactions, not the total.
Write explanations that someone else can read
Say what happened, not that a number went up. 'Insurance up because the annual premium posted in March instead of January' is useful. 'Higher than last month' is not. Include the amount, the cause and whether it will repeat.
Keep the notes with the close. Next year you will not remember.
A worked example of a note
Suppose office supplies jumped from $180 to $640. You open the transactions and find a $420 monitor bought in March. The note reads: monitor purchase, one-time, will not repeat, ask the CPA whether it is a fixed asset. Three short facts turn an alarming number into a closed question.
Now suppose revenue fell by a third. You open the sales and find a week of deposits that were never recorded because a bank feed disconnected. That one is an error, and the note says so and records the fix. The same review caught both.
Know when a variance means a mistake
A zero where you expect revenue, a negative expense, an expense in an account you do not use, or a balance sheet item that moved with no cash behind it deserve a look at the entries. Check the bank feed for duplicates and for transactions posted to the wrong period.
A workbook that flags only lines past both thresholds, and keeps flagging them until you write the explanation, makes the habit stick. The Month-End Close Workbook on this site has a flux tab built that way, and your CPA can tell you what level of review your situation needs.
Common questions
Should I compare to last month or last year?
Use both when you can. Last month shows what changed lately. Last year shows seasonal patterns.
What about budget variances?
The method is the same. Compare to the budget and explain the lines that miss it by more than your thresholds.
How often should I do this?
Once a month, as part of the close.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.