Month-end closing entries are essential for ensuring that your financial records accurately reflect the business’s activities for the period. These entries involve adjusting and closing temporary accounts (like revenue, expenses, and dividends) and updating permanent accounts (like assets, liabilities, and equity) to prepare for the new accounting period.
Common Month-End Closing Entries
- Revenue Recognition and Closing
- Expense Recognition and Closing
- Adjusting for Accrued Expenses
- Adjusting for Prepaid Expenses
- Depreciation Entry
- Inventory Adjustment
- Closing Income Summary to Retained Earnings
Example Entries
1. Revenue Recognition and Closing
At the end of the month, you need to close out your revenue accounts to the income summary.
Scenario: Your business earned $100,000 in revenue during the month.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Revenue | 100,000 | |
| 08-31-2024 | To Income Summary | 100,000 |
Explanation:
- Revenue will debited to close the revenue account.
- Income Summary will credited to transfer the balance to the income summary account.
2. Expense Recognition and Closing
At month-end, you close out your expense accounts to the income summary.
Scenario: Your business incurred $60,000 in expenses.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Income Summary | 60,000 | |
| 08-31-2024 | To Expenses | 60,000 |
Explanation:
- Income Summary will debited to recognize the expenses.
- Expenses will credited to close the expense accounts.
3. Adjusting for Accrued Expenses
Accrued expenses are those that have been incurred but not yet paid.
Scenario: Your business owes $5,000 in utilities for the month, which will be paid next month.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Utilities Expense | 5,000 | |
| 08-31-2024 | To Accrued Liabilities | 5,000 |
Explanation:
- Utilities Expense will debited to record the expense incurred during the month.
- Accrued Liabilities will credited to recognize the liability that will be paid in the future.
4. Adjusting for Prepaid Expenses
Prepaid expenses must be adjusted to reflect the portion that has been used up during the month.
Scenario: Your business prepaid $12,000 for a year’s insurance. Each month, $1,000 is recognized as an expense.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Insurance Expense | 1,000 | |
| 08-31-2024 | To Prepaid Insurance | 1,000 |
Explanation:
- Insurance Expense will debited to recognize the monthly expense.
- Prepaid Insurance will credited to reduce the prepaid asset account.
5. Depreciation Entry
Depreciation must be recorded to allocate the cost of fixed assets over their useful lives.
Scenario: Your business records $2,000 in monthly depreciation for equipment.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Depreciation Expense | 2,000 | |
| 08-31-2024 | To Accumulated Depreciation | 2,000 |
Explanation:
- Depreciation Expense will debited to recognize the cost allocation for the period.
- Accumulated Depreciation will credited to increase the contra asset account.
6. Inventory Adjustment
If there’s any inventory shrinkage, spoilage, or loss, an adjustment entry is needed.
Scenario: Your inventory count reveals $3,000 less than recorded.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Cost of Goods Sold | 3,000 | |
| 08-31-2024 | To Inventory | 3,000 |
Explanation:
- Cost of Goods Sold will debited to account for the missing inventory.
- Inventory will credited to decrease the inventory account.
7. Closing Income Summary to Retained Earnings
Finally, the balance in the income summary (net income) is transferred to retained earnings.
Scenario: Your business has a net income of $40,000 for the month.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Income Summary | 40,000 | |
| 08-31-2024 | To Retained Earnings | 40,000 |
Explanation:
- Income Summary will debited to close the account.
- Retained Earnings will credited to increase the equity account by the amount of net income.
8. Adjusting Unearned Revenue
If your business received payment for services not yet provided, you need to adjust the unearned revenue.
Scenario: Your business received $10,000 in advance for a service that will be provided over 5 months. At the end of the first month, $2,000 of that revenue is recognized.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Unearned Revenue | 2,000 | |
| 08-31-2024 | To Service Revenue | 2,000 |
Explanation:
- Unearned Revenue will debited to reduce the liability account as the revenue is earned.
- Service Revenue will credited to recognize the earned revenue.
9. Adjusting for Accrued Interest
Interest that has been incurred but not yet paid should be recorded as an accrued liability.
Scenario: Your business has a loan, and $1,500 in interest has accrued by the end of the month.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Interest Expense | 1,500 | |
| 08-31-2024 | To Accrued Interest Payable | 1,500 |
Explanation:
- Interest Expense will debited to record the expense incurred during the month.
- Accrued Interest Payable will credited to recognize the liability that will be paid in the future.
10. Adjusting for Accrued Revenue
Accrued revenue represents earnings that have been made but not yet billed or received.
Scenario: Your business provided $3,000 worth of services by the end of the month, but the customer will be billed in the next period.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Accounts Receivable | 3,000 | |
| 08-31-2024 | To Service Revenue | 3,000 |
Explanation:
- Accounts Receivable will debited to recognize the amount that will be billed.
- Service Revenue will credited to record the revenue earned during the period.
11. Adjusting for Bad Debts
If some receivables are unlikely to be collected, an adjustment is made for bad debts.
Scenario: You estimate that $2,500 of your accounts receivable will not be collected.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Bad Debt Expense | 2,500 | |
| 08-31-2024 | To Allowance for Doubtful Accounts | 2,500 |
Explanation:
- Bad Debt Expense will debited to record the expected loss.
- Allowance for Doubtful Accounts will credited to increase the contra asset account.
12. Closing Dividends
Dividends declared during the month are closed out to retained earnings.
Scenario: Your business declared $5,000 in dividends.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Retained Earnings | 5,000 | |
| 08-31-2024 | To Dividends | 5,000 |
Explanation:
- Retained Earnings will debited to decrease equity by the amount of dividends declared.
- Dividends will credited to close out the dividend account.
13. Adjusting for Supplies Expense
If your business uses supplies over time, you need to adjust for the amount used.
Scenario: Your business started the month with $1,000 in supplies and used $600 during the month.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Supplies Expense | 600 | |
| 08-31-2024 | To Supplies | 600 |
Explanation:
- Supplies Expense will debited to record the cost of supplies used during the month.
- Supplies will credited to reduce the asset account.
14. Closing Drawings to Capital
If the owner withdrew funds during the month, the drawings account must be closed to the capital account.
Scenario: The owner withdrew $3,000 during the month.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Capital | 3,000 | |
| 08-31-2024 | To Drawings | 3,000 |
Explanation:
- Capital will debited to reduce the owner’s equity by the amount withdrawn.
- Drawings will credited to close the drawings account.
These entries ensure that all temporary accounts are closed and the financial records are accurately prepared for the next accounting period.