Happy Tuesday,
Welcome back to Balance Sheet. Every issue follows one real business with a problem hiding in its numbers, walks through what went wrong on the books, and shows you the fix.
Today's issue is about the month-end close, the routine that turns a month of transactions into numbers you can trust. Jonah Whitaker runs an event rental company in Richmond, Virginia, and his July P&L showed $38,000 of net income that was really $9,400. He had already signed a three-year warehouse lease based on the bigger number. The fix was a five-day month-end close with a written checklist.
Here's how it started and what it can teach you before you make your next decision off a monthly report.
A great July in Richmond
Whitaker Event Rentals supplies tents, tables, chairs, and dance floors for weddings across central Virginia. Summer pays for the winter in this business, so July matters more than any other month.
On August 3, Jonah opened QuickBooks and pulled the July profit and loss statement. Net income: $38,000. His best month in four years.
He called the owner of an empty warehouse off Route 1 that afternoon and signed a three-year lease at $4,200 a month. A second location would let him take bookings in Williamsburg and Fredericksburg without hauling everything 60 miles each way.
Two weeks later, his outside accountant, Renee Castillo, opened the same report and asked one question. "Who closed July?"
Nobody had. The software had recorded the cash that came in and the bills someone remembered to enter, then printed a report. Renee spent four days working through the month. When she finished, July net income was $9,400.
Where $28,600 went
Every dollar of the gap came from a routine adjustment that only gets made when someone runs a close. Nobody committed fraud, and nobody mistyped a number.
| Adjustment |
What happened |
Effect on July net income |
| Deferred revenue |
$17,500 of deposits for fall weddings booked as July sales |
-$17,500 |
| Accrued wages |
Crew worked the last week of July, paid August 7 |
-$4,800 |
| Unrecorded vendor bill |
Tent-cleaning invoice left sitting in an inbox |
-$2,900 |
| Depreciation |
$216,000 of rental inventory over six years, never posted |
-$3,000 |
| Card reconciliation |
Fuel and supplies on the company card, never coded |
-$400 |
| Total |
|
-$28,600 |
The biggest line surprised Jonah the most. Couples had paid $17,500 in deposits during July for weddings in September and October. The cash was real, and it was sitting in his checking account. Under accrual accounting, that money is deferred revenue, a liability, because Whitaker still owed those couples a tent, 200 chairs, and a dance floor on a future date. It becomes revenue when the event happens.
The other four lines followed the same logic from the expense side. The crew earned $4,800 in July and got paid in August, so July carried wages it had never recorded. A $2,900 invoice sat unopened. And $216,000 of rental inventory lost value every month whether anyone booked a depreciation entry or not.
Put it together, and the math is simple.
Adjusted net income = Unadjusted net income - Deferred revenue - Accrued expenses - Unrecorded bills - Depreciation - Uncoded charges
$38,000 - $17,500 - $4,800 - $2,900 - $3,000 - $400 = $9,400
The bank balance agreed with the wrong number
July's cash balance was the highest of the year, which made the $38,000 look believable. Jonah checked his bank app before signing the lease, saw plenty of money, and felt confident.
That cash included $17,500 of customers' money for events that hadn't happened yet. Spending it on rent in August meant borrowing from October's weddings. When bookings slowed in November, the bill would come due, with a warehouse lease stacked on top.
A P&L pulled on the third of the month mostly shows when cash moved. The close adjusts it to show when revenue was earned and costs were incurred, which is the version worth making decisions from.
What a close actually involves
The month-end close is the set of steps accountants run after the last day of the month to make sure every transaction lands in the right period, every balance sheet account reconciles, and every adjusting entry is posted. Then, and only then, the financial statements go out.
Renee set Jonah up on a five-day calendar.
| Day |
Task |
Output |
| 1 |
Record every bill, invoice, payroll run, and card charge |
Complete general ledger |
| 2 |
Reconcile bank, credit card, AR, and AP subledgers to the GL |
Reconciled balances |
| 3 |
Post accruals, deferrals, and depreciation |
Adjusted trial balance |
| 4 |
Review the balance sheet and run variance analysis |
Written explanation for every big move |
| 5 |
Issue the P&L, balance sheet, and cash flow, then lock the period |
Final financial statements |
The order matters. Adjusting entries built on unreconciled balances carry the errors forward. The review on day four has one job: every significant movement gets a written explanation before anyone sees the statements.
The two-minute test that would have caught it
Variance analysis sounds formal, but the core is one calculation.
Variance % = (Current period - Comparison period) ÷ Comparison period × 100
Jonah's unadjusted July revenue was $96,000. The prior July was $68,000.
($96,000 - $68,000) ÷ $68,000 × 100 = 41.2%
A 41% jump with the same fleet, the same crew, and no new marketing needs an answer. The answer was $17,500 of fall deposits. Once those came out, July revenue was $78,500, up 15.4% on the prior year. That's a strong month by any standard and a believable one.
Reverse the accrual on August 1
The $4,800 wage entry needed a follow-up. It recorded a cost July earned and August would pay, so Renee posted it as a reversing entry dated August 1. When the crew's paycheck cleared on August 7, payroll expense hit the books again, and the reversal cancelled the duplicate. Skip that step and August carries the same $4,800 twice, which makes a slow month look worse than it was. QuickBooks and Xero both have a reverse option on the journal entry screen. Tick it the moment you post the accrual, and the software handles the rest.
Lock it when it's done
The last step is the one small businesses skip. After sign-off, set a closing date in your accounting software so nobody posts into July by accident in September. Late adjustments still happen, but they go through a journal entry with a memo explaining why, so the audit trail survives.
What happened to the warehouse
Jonah kept the lease. With the real number in front of him, he sublet half the space to a local caterer for $1,800 a month, which cut his net cost to $2,400. His closes now wrap up by the fifth business day, and he doesn't approve a spending decision over $2,000 until they do.
A monthly report pulled before the close is a draft. Jonah signed a three-year commitment on a draft, and four days of accounting work turned it into a report he could act on.
Day two of that calendar is bank reconciliation, the step that explains why your books and your bank almost never show the same balance. That's Friday's issue.
Balance Sheet publishes every Tuesday and Friday. The numbers behind every smart business decision.
