Monthly accounting journal entries for the close

Which entries reverse

Only accruals reverse. An accrual records a cost before the invoice or payroll arrives, and a reversing entry dated the first day of the next month clears it so the real transaction is not counted twice. Set these to auto-reverse: accrued professional fees, accrued payroll and employer payroll taxes, and accrued revenue.

Do not reverse prepaid amortization, depreciation or the lease entries. Each one is a schedule that moves forward once a month and stops when the schedule ends. Reversing one cancels a month of expense that was booked correctly.

Accrued PTO is a balance, not a reversal. Each month, true the balance up to the calculated amount, so the entry is the change between the new balance and the old one.

Decision rule: if the amount is an estimate that a later invoice or payroll run will replace, the entry reverses. If the amount is a fixed schedule such as rent, insurance or depreciation, it does not.

Accrued professional fees

Assume a firm does 2,400 of work at month-end and the invoice arrives the following month. The month-end entry is debit Professional fees expense 2,400, credit Accrued liabilities 2,400, set to reverse on the first day of the next month.

The reversal is debit Accrued liabilities 2,400, credit Professional fees expense 2,400. When the invoice arrives, post it normally: debit Professional fees expense 2,400, credit Accounts payable 2,400. Next month's professional fees net to zero, which is correct because the cost sat in the prior month.

Failure mode: the reversal is missed. The invoice then lands as a second 2,400 expense, and the accrued liability stays open until someone clears it by hand. Check the accrued liabilities account each month for accruals with no reversal.

Prepaid expenses

A 12,000 annual insurance premium paid at the start of the year goes to the balance sheet. The payment entry is debit Prepaid insurance 12,000, credit Cash 12,000. Set up a schedule with the policy start date, end date, monthly amount and remaining balance. 12,000 divided by 12 is 1,000 a month.

Each month-end: debit Insurance expense 1,000, credit Prepaid insurance 1,000. Do not reverse it. After three entries the prepaid balance should be 9,000, and the schedule's remaining balance column should show the same figure. If the two differ, look for a mid-term policy change or a skipped month.

Depreciation

A 60,000 piece of equipment placed in service at the start of a month, with a five-year life and no salvage value, is 1,000 of book depreciation a month: 60,000 divided by 60. The entry is debit Depreciation expense 1,000, credit Accumulated depreciation 1,000.

Keep the book schedule separate from tax depreciation. Publication 946 explains that most property must be depreciated under the Modified Accelerated Cost Recovery System (MACRS) for tax purposes, and the tax figure usually differs from straight-line book depreciation. The fixed asset register should carry both columns, and the monthly entry should use only the book column.

Failure mode: depreciation keeps running after a sale or scrapping. Remove the asset from the register in the disposal month, book the gain or loss, and check that the monthly depreciation total ties to the register.

Operating lease under ASC 842

Take a five-year office lease at 3,000 a month, paid at the end of each month. Discount the 60 payments at an assumed monthly rate of one-half of one percent. The lease liability is about 155,177, and the right-of-use asset starts at the same amount when there are no initial direct costs or incentives.

In month one, interest accretion is 155,177 times the monthly rate, or 775.89. The lease cost is a single straight-line charge of 3,000. The liability falls by 2,224.11 (3,000 less 775.89), and the right-of-use asset falls by the same amount. The entries are debit Operating lease liability 3,000, credit Cash 3,000 for the payment, then debit Operating lease cost 3,000, credit Operating lease liability 775.89 and credit Right-of-use asset 2,224.11.

With flat rent, the lease cost stays at 3,000 each month. If rent steps up, the straight-line cost is total payments divided by the term, so it stays level while cash payments change.

Finance leases and the classification test

A finance lease splits cost into interest and amortization. On the same lease, the monthly entries are debit Lease liability 3,000, credit Cash 3,000; debit Interest expense 775.89, credit Lease liability 775.89; and debit Amortization expense 2,586.28, credit Accumulated amortization 2,586.28. 155,177 divided by 60 is 2,586.28.

Classify the lease at commencement, not each month. Test ownership transfer, a purchase option the lessee is reasonably certain to exercise, a lease term covering a major part of the asset's economic life, and payments substantially equal to the asset's fair value. Write the answer on the lease schedule so the monthly entry follows it.

Payroll accrual

Assume a payroll period runs from the 20th of one month to the 3rd of the next, and the December portion of wages is 15,000 and unpaid at month-end. The employer share of Social Security and Medicare is 6.2% plus 1.45%, so the tax on that accrual is 1,147.50.

The month-end entry is debit Wages expense 15,000, debit Payroll tax expense 1,147.50, credit Accrued payroll and taxes 16,147.50. The reversal on the first day of the next month is debit Accrued payroll and taxes 16,147.50, credit Wages expense 15,000, and credit Payroll tax expense 1,147.50.

When the payroll runs, post the full gross of 30,000 to Wages expense and the employer taxes of 2,295 to Payroll tax expense, then credit cash for net pay and the withholding and FICA payables. January's wages net to 15,000, the portion earned after the reversal. Without the reversal, that 15,000 is counted twice.

Payroll tax deposits and Form 941

The deposit schedule is separate from the accrual. Under the monthly deposit schedule, deposit employment taxes on payments made during a month by the 15th day of the following month. Publication 15 says an employer is a monthly schedule depositor if it reported $50,000 or less of taxes for the lookback period.

Form 941 is filed quarterly, and the Instructions for Form 941 give the due dates: April 30 for the first quarter (January through March), July 31 for the second, October 31 for the third, and January 31 of the following year for the fourth. Compare the December accrual to the payroll register before the fourth-quarter filing.

What to review each month

Auto-reversing accruals still need a check. Match each accrued professional fee to the invoice received, confirm the reversal posted, and confirm the accrued payroll reversal matches the first payroll run of the new month.

Recalculate these every month: depreciation against the fixed asset register, the operating lease liability against the amortization table, the prepaid balance against the schedule, and accrued PTO against the calculated balance.

Decision rule: if an invoice that covers the accrued month arrives after the books close, leave the accrual as booked and record the difference in the next month. If the invoice covers a later month, reverse the accrual and book the invoice where it belongs.

Setting up recurring entries

Set accruals to auto-reverse on the first day of the next period. Set prepaid, depreciation and lease entries to recur without reversal, and attach the schedule that produced each amount as the entry's support.

The step that slips is getting the inputs to the bookkeeper before the close. Payroll registers, lease amortization tables and the fixed asset register need to arrive before month-end, not during it. Usual's recurring document requests can ask the client for the lease statement and payroll register each month, and its automatic reminders chase anything missing before the close date. Decision rule: if the lease statement or payroll register is not in the file at close, book the amount from the schedule, mark the entry as estimated, and true it up when the document arrives.