Discover why Sarah's revenue and expense accounts must be reset after March
In Lesson 02 you helped Sarah record her adjusting entries for March — accrued revenue, deferred revenue, depreciation, and everything else that makes her financial statements accurate. Her adjusted trial balance finally balanced, and she was relieved.
But then Marcus, her mentor, dropped another bomb:
Sarah looked at her ledger. After all the adjustments, her March accounts showed:
| Account | March Balance | Type |
|---|---|---|
| Service Revenue | $8,700 | Revenue |
| Rent Expense | $1,500 | Expense |
| Salaries Expense | $2,800 | Expense |
| Depreciation Expense | $75 | Expense |
| Supplies Expense | $320 | Expense |
| Net Income | $4,005 | — |
If Sarah does nothing, April 1st starts with Service Revenue already at $8,700 and expenses already sitting in their accounts. Her April "profit" would be meaningless.
The Fix: Closing Entries
Closing entries zero out every temporary account (revenues, expenses, and dividends) and transfer the net result into Retained Earnings, a permanent account. After closing, every temporary account starts the new period at $0.
1. After Sarah records all her adjusting entries for March, her Service Revenue account shows $8,700. What should the Service Revenue balance be on April 1st?
2. Why can't Sarah just keep adding each month's revenues and expenses into the same running totals forever?
By the end of this lesson you will be able to:
- Tell which accounts are temporary and which are permanent
- Explain why closing entries happen after adjusting entries, not before
- Prepare the four-step closing sequence for any set of account balances
- Verify that all temporary accounts are zero after closing
This is the last manual step before Lesson 04, where you'll pull the entire month-end close together into one checklist.