Lesson 2.3 40 min
The month-end close
Cut-off and the recurring adjusting entries, then review and a close calendar a small team can keep.
The close is the routine that turns a month of raw transactions into statements someone can rely on. Without one, the books record what was paid and received and little else. Northside's unadjusted December books showed income before tax of $140,115. After the close, the figure was $32,680. The difference is the subject of this lesson.
Why a close has a calendar
A close is a fixed sequence of tasks done in the same order every month by a set day. The day is fixed because statements lose most of their use if they arrive six weeks late. Pick a day, such as the fifth business day after month end, and hold to it. Speed comes from routine more than from skill: the same checklist, the same owner for each task, the same evidence filed in the same place.
Cut-off
Cut-off means that every transaction lands in the period in which it happened. The usual failures are at the edges of the month:
- Supplier invoices for goods received on the 30th that arrive on the 3rd.
- Sales on the last evening that settle with the card processor on the 1st.
- Payroll periods that span two months.
The fix is a short list of known edge items, checked every month. For Northside that list includes the last card batch of the month, the dairy invoice (delivered every Monday), and the payroll period that ends on the second Sunday.
The adjusting entries that come up every month
Most small-business adjustments fall into a few families, and most of them recur every month in the same form:
- Accruals: expenses incurred but not yet billed or paid, such as wages, interest or utilities.
- Deferrals: cash paid or received ahead of the expense or revenue, such as prepaid rent or insurance and gift cards or deposits.
- Depreciation and amortization.
- Inventory: the count or the perpetual system's adjustment to cost of goods sold.
- Reconciling items found during bank and account reconciliations, such as service charges.
- Tax provisions, at least quarterly.
A recurring entry should be set up once with its calculation documented, then reviewed each month instead of rebuilt.
Review before you report
Once the entries are posted, the person reviewing the close compares the trial balance with expectations. Three comparisons catch most errors:
- Each balance sheet account against its supporting schedule or reconciliation. Every balance sheet line should have one.
- Each income statement account against the prior month and the budget. Large or odd movements need an explanation.
- Margins and ratios against their normal range. A gross margin that jumps five points in a month usually means a cut-off or inventory error, not a sudden improvement.
The reviewer should be a different person from the preparer where the team allows. In a business with one bookkeeper, the owner reviewing the statements and the reconciliations each month serves the same purpose.
A close calendar for a small team
A five-day close for a business Northside's size might run like this:
- Day 1: Download bank, card and processor statements. Post the last sales and payroll.
- Day 2: Reconcile bank, card processor and credit card accounts. Post reconciling items.
- Day 3: Post accruals, deferrals, depreciation and the inventory adjustment.
- Day 4: Review the trial balance against supporting schedules and the prior month. Investigate variances.
- Day 5: Issue statements to the owners. Lock the period in the accounting software so later entries can't change it by accident.
Lock the period. If entries can still be posted to a closed month, the statements already sent to the bank stop matching the books.
Worked case
Northside's December close
Northside closes monthly, but for this case the seven adjustments below are the annual entries made in the December close. Each one corrects a gap visible in the unadjusted trial balance in lesson 1.1.
| Ref | Entry | Debit | Credit |
|---|---|---|---|
| A1 | 2025-12-31 Bank service charge found on the December statement | ||
| 6200 Utilities and other | 35 | ||
| 1000 Cash | 35 | ||
| A2 | 2025-12-31 Wages earned Dec 22 to 31, paid in January | ||
| 6000 Wages expense | 4,000 | ||
| 2100 Wages payable | 4,000 | ||
| A3 | 2025-12-31 January 2026 rent paid in December | ||
| 1300 Prepaid rent | 3,000 | ||
| 6100 Rent expense | 3,000 | ||
| A4 | 2025-12-31 Six months of the insurance policy used | ||
| 6400 Insurance expense | 2,400 | ||
| 1310 Prepaid insurance | 2,400 | ||
| A5 | 2025-12-31 Depreciation, 72,000 over 6 years, straight line | ||
| 6500 Depreciation expense | 12,000 | ||
| 1510 Accumulated depreciation | 12,000 | ||
| A6 | 2025-12-31 Inventory count 6,000; the rest was used or sold | ||
| 5000 Cost of goods sold | 92,000 | ||
| 1200 Inventory | 92,000 | ||
| A7 | 2025-12-31 Income tax at the case rate of 10% | ||
| 8000 Income tax expense | 3,268 | ||
| 2300 Income tax payable | 3,268 | ||
The effect on income before tax is large. Most of it comes from the inventory adjustment, since Northside records purchases to inventory and only counts once a year in this case. A business that counted monthly, or used a perpetual inventory system, would spread that adjustment across the year.
| $ | |
|---|---|
| Income before tax on the unadjusted books | 140,115 |
| A1 Bank service charge found on the December statement | (35) |
| A2 Wages earned Dec 22 to 31, paid in January | (4,000) |
| A3 January 2026 rent paid in December | 3,000 |
| A4 Six months of the insurance policy used | (2,400) |
| A5 Depreciation, 72,000 over 6 years, straight line | (12,000) |
| A6 Inventory count 6,000; the rest was used or sold | (92,000) |
| Income before tax after the close | 32,680 |
After the close, the trial balance totals $432,068 on each side.
| Account | Debit | Credit |
|---|---|---|
| 1000 Cash | 58,580 | |
| 1100 Accounts receivable | 3,500 | |
| 1200 Inventory | 6,000 | |
| 1300 Prepaid rent | 3,000 | |
| 1310 Prepaid insurance | 2,400 | |
| 1500 Equipment | 72,000 | |
| 1510 Accumulated depreciation | 12,000 | |
| 2000 Accounts payable | 9,000 | |
| 2100 Wages payable | 4,000 | |
| 2200 Unearned revenue (gift cards) | 1,800 | |
| 2300 Income tax payable | 3,268 | |
| 2500 Bank loan | 32,000 | |
| 3000 Share capital | 60,000 | |
| 3200 Dividends declared | 6,000 | |
| 4000 Counter sales | 296,000 | |
| 4100 Catering revenue | 14,000 | |
| 5000 Cost of goods sold | 92,000 | |
| 6000 Wages expense | 104,000 | |
| 6100 Rent expense | 36,000 | |
| 6200 Utilities and other | 21,000 | |
| 6300 Card processing fees | 7,400 | |
| 6400 Insurance expense | 2,400 | |
| 6500 Depreciation expense | 12,000 | |
| 7000 Interest expense | 2,520 | |
| 8000 Income tax expense | 3,268 | |
| Totals | 432,068 | 432,068 |
Template
Month-end close workbook
A close checklist by day with owner, evidence and sign-off columns, and an adjusting entries register that checks each entry balances and shows the effect on profit. Northside's December adjustments are loaded.
The full working file, 2-3-month-end-close.xlsx, is in the Accounting and Finance Toolkit, Part 1. The lesson above teaches the method and shows the worked numbers, so you can build it yourself in any spreadsheet.
Exercises
Work these, then open the answers
On January 3, Northside receives a $1,150 dairy invoice for milk delivered December 29. Is it a December or January expense? What entry is needed at December 31 if the invoice wasn't in the books?
Answer
December. Debit 1200 Inventory 1,150 and credit 2000 Accounts payable 1,150. (Because Northside records purchases to inventory, the expense comes through cost of goods sold when the count is applied.)
Sort Northside's adjusting entries into accruals and deferrals.
Answer
Accruals: A2 (wages) and A7 (income tax). A1 is a reconciling item from the bank reconciliation. Deferrals: A3 (prepaid rent) and A4 (insurance used from a prepayment). A5 is depreciation and A6 is the inventory adjustment.
Northside's gross margin in November was 69% and in December 77%. Name two likely causes worth checking.
Answer
A missing supplier invoice at cut-off (purchases understated) and an inventory count error (closing inventory overstated). Both reduce cost of goods sold and inflate the margin.
Check
4 questions
Sources
Sources
- Where to keep your records, for how long and how to request permission to destroy them early, Canada Revenue Agency
- IFRS 15 Revenue from Contracts with Customers, IFRS Foundation
- IAS 2 Inventories, IFRS Foundation
- Principles of Accounting, Volume 1: Financial Accounting, OpenStax, Rice University