Reflect on confidence, connect to business problem, preview closing entries
What You Built Today
You started with a timing problem: cash moves on its own schedule, work happens on a different schedule. You learned the four adjustment types that GAAP uses to fix this mismatch. You practiced identifying and recording adjustments until the procedure felt reliable.
Key Takeaway:
Adjusting entries never involve Cash. They only reclassify amounts already on the books or add amounts that should be there. They always touch at least one income statement account and one balance sheet account.
- Accrued revenue: work done, cash not yet received
- Accrued expense: cost incurred, cash not yet paid
- Deferred revenue: cash received before work is done
- Deferred expense: cash paid before cost is incurred
- How each adjustment changes the income statement
Sarah now understands exactly which adjustments her month-end close requires every month. These four types are the core logic that her Month-End Wizard must automate.
"I can see the pattern now. Every month-end has these same four situations. If I can teach the spreadsheet to spot them, the close gets so much faster."
Lesson 3: Closing Entries
After adjustments are posted, temporary accounts must be reset to zero. Learn what gets closed, why, and how the process works.
Whenever you face a month-end scenario, use this decision tree:
Step 1: Did cash already move?
- No, cash has not moved → Accrued (revenue if work done, expense if cost incurred)
- Yes, cash already moved → Deferred (revenue if cash came in, expense if cash went out)
Step 2: What is the amount for this period only?
- For accrued items: the full amount of work done or cost incurred this period
- For deferred items: total prepaid amount ÷ number of periods
Step 3: Which accounts?
- Revenue side → A/R or Deferred Revenue + Service Revenue
- Expense side → Expense account + A/P or Prepaid asset
Preview: Closing Entries
In Lesson 3 you will learn what happens after all adjusting entries are posted. The revenue and expense accounts now have the correct balances for March—but they need to be reset to zero so April can start fresh. That process is called closing entries.
Closing entries transfer the net result of the month (revenue minus expenses) into Retained Earnings. They do not change the accuracy of the month—they prepare the books for the next month.