The month-end close workflow: step-by-step procedure with checklists and flow diagrams
The Month-End Close Workflow
A step-by-step procedure that ensures every adjustment is caught before the books are closed.
The month-end close is not a random collection of tasks. It follows a specific sequence that professional accountants use every month. Each step builds on the one before it, and skipping a step means the financial statements will be wrong.
Follow this sequence exactly. Each step produces an output that the next step depends on.
Prepare the Unadjusted Trial Balance
List all account balances from the general ledger. Verify that total debits equal total credits. This is your starting point—no adjustments yet.
Output: Unadjusted Trial Balance
Identify and Record Adjusting Entries
Review every account for required adjustments. This is the most critical step. Check for:
- Accrued revenues: Revenue earned but not yet recorded
- Accrued expenses: Expenses incurred but not yet paid (wages, interest, utilities)
- Deferred revenues: Cash received in advance—recognize what was earned
- Prepaid expenses: Cash paid in advance—expense what was used (supplies, insurance)
- Depreciation: Allocate equipment/building cost for the month
Output: All adjusting journal entries recorded
Prepare the Adjusted Trial Balance
Update all account balances with the adjusting entries. Verify debits still equal credits. This trial balance is the source for the financial statements.
Output: Adjusted Trial Balance
Prepare Financial Statements
Use the adjusted trial balance to prepare:
- Income Statement: Revenues - Expenses = Net Income
- Statement of Retained Earnings: Beginning RE + Net Income - Dividends = Ending RE
- Balance Sheet: Assets = Liabilities + Equity
Output: Complete set of financial statements
Record Closing Entries
Close all temporary accounts to zero:
- Close revenues to Income Summary (debit revenues, credit Income Summary)
- Close expenses to Income Summary (credit expenses, debit Income Summary)
- Close Income Summary to Retained Earnings
- Close Dividends to Retained Earnings (debit RE, credit Dividends)
Output: All temporary accounts at zero; Retained Earnings updated
Prepare the Post-Closing Trial Balance
List only permanent accounts (assets, liabilities, equity). Verify debits equal credits. The books are now ready for the next period.
Output: Post-Closing Trial Balance — books are closed and ready
Let's walk through Step 2 with Sarah's actual March data. Her unadjusted trial balance shows these accounts that need adjustment:
| Account | Unadjusted Balance | Adjustment Needed |
|---|---|---|
| Supplies | $8,000 (debit) | Physical count: $2,500 remaining → $5,500 used |
| Prepaid Insurance | $3,600 (debit) | 12-month policy, 1 month expired → $300/month |
| Equipment | $24,000 (debit) | 5-year life, no salvage → $400/month depreciation |
| Wages Payable | $0 | Wages earned Mar 28-31 not yet paid → $1,800 |
| Unearned Revenue | $2,400 (credit) | Half of prepaid project completed → $1,200 earned |
Adjusting Journal Entries:
Entry A — Supplies Used:
Debit Supplies Expense ........ $5,500
Credit Supplies ........................ $5,500
Entry B — Insurance Expired:
Debit Insurance Expense ....... $300
Credit Prepaid Insurance ........ $300
Entry C — Depreciation:
Debit Depreciation Expense .. $400
Credit Accum. Depreciation ... $400
Entry D — Accrued Wages:
Debit Wages Expense ............ $1,800
Credit Wages Payable ............ $1,800
Entry E — Revenue Earned:
Debit Unearned Revenue ...... $1,200
Credit Service Revenue ......... $1,200