Month-end close journal entries, with examples

A business buys an asset once and uses it for years, so the cost is spread across those years rather than charged to the month of purchase. The monthly entry is the annual depreciation divided by twelve.

Example. A $12,000 van depreciated over five years is $2,400 a year, or $200 a month. Debit Depreciation expense $200, credit Accumulated depreciation $200. The van stays on the balance sheet at cost, and accumulated depreciation grows beneath it.

When you pay for something in advance, the payment is an asset until you use it. Each month you move the used part into expense.

Example. Annual insurance of $6,000 paid in January is recorded as a prepaid asset. Each month: debit Insurance expense $500, credit Prepaid insurance $500. After twelve months the asset is zero and each month carried its own share.

Costs you have incurred but not yet been billed for belong in the month you incurred them. Without the entry, the month looks more profitable than it was and the next month looks worse.

Example. A contractor finished $3,000 of work in March and invoices in April. In March: debit the relevant expense $3,000, credit Accrued liabilities $3,000. When the bill arrives, it clears the liability rather than hitting April's profit.

Money received before the work is done is a liability, not income. This is the entry most service businesses get wrong, and the one an investor checks first.

Example. A client pays $12,000 in January for a year of service. January records $12,000 as Deferred revenue, then each month: debit Deferred revenue $1,000, credit Revenue $1,000. Cash arrived once; income arrives twelve times.

Pay periods rarely end on the last day of the month, so part of the next payroll belongs to the month that just ended.

Example. A pay period runs 26 March to 8 April and is paid on 10 April. The six days from 26 to 31 March belong to March: debit Wages expense for those days, credit Accrued payroll. Reverse it when the payroll posts, so April is not charged twice.

Getting this right also keeps the payroll tax filings and the books telling the same story, which is what makes a return straightforward. Best for an owner who wants accrual books without posting these entries themselves: SF Business Solutions posts them as part of the monthly close, from $250 a month, and prepares and files the return from the same books.

Adjusting entries are where small errors become permanent, so run through the same short list every month before you set the closing date.

• Does every reversing entry actually reverse next month?
• Do the prepaid and accrual balances still agree to a schedule you can show someone?
• Is deferred revenue equal to the work you still owe clients?
• Did depreciation post for every asset, and only once?
• Are the entries described well enough that a reviewer can follow them in a year?