Module 4 — Accruals, adjusting entries and the monthly close

Level: Intermediate · Duration: 5 hours · Tracks: 🔵 🟣 · Prerequisite: Module 3

1. Objectives

By the end of this module you will be able to:

  1. Explain the difference between the cash basis and the accrual basis, and pick the right basis for your store and for your statutory obligations.
  2. Apply the matching principle to the awkward e-commerce expenses: advertising, subscriptions, storage.
  3. Write the six core adjusting entries: accrued expenses, accrued revenue, prepaid expenses, deferred revenue, depreciation, provisions.
  4. Calculate depreciation on the straight-line method and spread it month by month.
  5. Run a 12-step monthly close checklist and finish it inside a set time.

2. Core concepts

2.1 Cash or accrual?

Cash basis Accrual basis
When revenue is recognised When the money arrives When the product is delivered to the customer
When an expense is recognised When the money is paid When the benefit is used up
The advantage Very simple It reflects real performance
The drawback It distorts any month with an inventory purchase or an advance payment It requires adjusting entries

The decision: the accrual basis is not optional for you if you want sound financial statements under the international standards, and it is the basis on which UAE corporate tax returns are built. The cash basis may do for a store in its first few months, but it turns misleading the moment you buy a large batch of inventory or pay an annual subscription.

An example that shows the gap — January at Nuwa:

Cash Accrual
Revenue 96,213.60 (actually collected) 95,520.00 (actually delivered)
Inventory bought 69,000 expensed in full only 33,120 (the part sold)
Rent 18,000 expensed in full 3,000 (one month)
Result an apparent loss a profit of 24,312

The cash basis would have made you believe January was a disaster, so you would have stopped the advertising and cut the inventory — a wrong decision built on a wrong measurement.

2.2 The matching principle

An expense is recorded in the period it helped generate revenue in, not in the period it was paid in.

In an e-commerce store this principle runs into three awkward cases:

The case The question The practical rule
An ad that produces sales weeks later Do I capitalise it? No — it is expensed in the month the ad ran. Certainty is not high enough to capitalise.
An annual subscription paid in one go A full expense? No — an asset consumed over 12 months
Amazon storage fees on goods that have not sold An inventory cost? No — an operating expense in its own month; storage cost after arrival is not capitalised

2.3 The six adjusting entries

Type The situation The entry An example from Nuwa
1. Accrued expense Used up, not paid, no invoice Dr expense / Cr accrued expenses Professional fees 2,500
2. Prepaid expense Paid, not yet used up Dr expense / Cr prepaid expenses The month's rent 3,000
3. Accrued revenue Delivered, not collected Dr due from customers / Cr sales Orders shipped on 31/1 and not yet settled
4. Deferred revenue Collected, not delivered Dr bank / Cr deferred revenue A pre-order
5. Depreciation An asset losing value through use Dr depreciation expense / Cr accumulated depreciation Equipment 500
6. Provision/damage A probable or a realised loss Dr expense / Cr provision Returns provision, damaged inventory

2.4 Depreciation — the straight line

Annual charge = (cost − residual value) ÷ useful life
Monthly charge = annual charge ÷ 12

Nuwa's equipment: (24,000 − 0) ÷ 4 years = 6,000 a year ÷ 12 = 500 a month.

Two points beginners get wrong:
- Accumulated depreciation is a contra account: do not deduct it from the equipment account directly. The balance sheet shows 24,000 − 500 = 23,500 and keeps the original cost visible.
- Depreciation is not cash: not one dirham leaves the bank because of it — which is why it is added back in the cash flow statement.

2.5 The returns provision — specific to e-commerce

You sold goods on 28 January, and you know from your own history that 4% of them will come back in February. Accrual says: recognise the expected return in January, because it belongs to January's sales.

31 January | AJE-4
   Dr  4020 Sales Returns (provision)                       X
       Cr  2400 Returns Provision                                X
   Dr  1200 Inventory — goods expected back                 Y
       Cr  5010 Cost of Goods Sold                              Y

In this course we relied on actual returns to keep the first month simple, but the moment your store settles on a known return rate, ignoring the provision becomes an inflation of every month's profit.

2.6 The monthly close checklist — 12 steps

# The step The reference document The time target
1 Download the bank, gateway and platform statements Official statements Day 1
2 Post every unposted journal entry The journal Day 1
3 Reconcile the bank Bank statement Day 2
4 Reconcile the payment gateway and the platforms Settlement statements Day 2
5 Reconcile the cash-on-delivery account Courier statement Day 2
6 Count the inventory and match it to the books Stock count report Day 3
7 Record cost of goods sold and the count differences The cost calculation Day 3
8 Accrued and prepaid expense entries Contracts and invoices Day 3
9 The depreciation entry Fixed asset schedule Day 3
10 Match the input and output tax accounts The tax register Day 4
11 Produce the trial balance and check that it balances The system Day 4
12 Prepare the three statements and review the odd swings The statements Day 5

The five-day rule: a close that takes more than 5 working days in a young store means your problem is in daily discipline, not in the close. Numbers that arrive 20 days late are no use for taking a decision.

3. A worked example — closing January 2026 at Nuwa

Step 1 — list what needs adjusting. Walk down the trial balance account by account and ask: does this balance tell the truth on 31 January?

The account Balance before adjustment Does it tell the truth? The adjustment
1300 Prepaid Expenses 18,000 ✗ — one month has been used up AJE-2
1500 Equipment 24,000 ✗ — used for a month AJE-1
6240 Professional Fees 0 ✗ — the service was performed and the invoice has not arrived AJE-3
1010 Bank 184,853.60 ✓ after the bank reconciliation —
1200 Inventory 35,880 ✓ if it matches the count check

Step 2 — write the entries:

31 January 2026 | AJE-1 | Ref: fixed asset schedule
   Dr  6300 Depreciation Expense                    500.00
       Cr  1510 Accumulated Depreciation — Equipment      500.00
   Memo: depreciation of the equipment for January — straight line, 4-year life

31 January 2026 | AJE-2 | Ref: lease contract W-2026
   Dr  6220 Rent Expense                          3,000.00
       Cr  1300 Prepaid Expenses                        3,000.00
   Memo: charging January's rent out of the six-month payment

31 January 2026 | AJE-3 | Ref: accountant's fee quote PA-11
   Dr  6240 Professional Fees                     2,500.00
       Cr  2020 Accrued Expenses                        2,500.00
   Memo: accounting fees for January whose invoice has not arrived

Step 3 — measure the effect:

The item Before adjustment After adjustment The effect
Net profit 30,312.00 24,312.00 −6,000.00
Total assets 262,733.60 259,233.60 −3,500.00
Total liabilities 82,421.60 84,921.60 +2,500.00

The lesson: three entries that do not move a single dirham out of the bank cut the reported profit by 20%. A store that ignores adjusting entries lives on an imaginary profit — then gets a surprise at year end in the shape of a gap it calls "the accountant's mistake".

Step 4 — the final check: produce the trial balance again ⇒ 341,026.00 on both sides ✓

4. Exercises

E4.1 — Classification (beginner). Say which type of adjustment each case needs on 31 March:
(a) an annual Shopify subscription of 14,400 paid on 1 January — (b) the March electricity invoice arriving on 10 April, estimated at 1,900 — (c) a customer who paid 3,500 for a pre-order shipping in May — (d) a shipment delivered to the customer on 30 March that the gateway will settle on 6 April — (e) a computer bought on 1 February for 9,600, with a 3-year life.

E4.2 — The annual subscription (beginner→intermediate). A subscription of 14,400 dirhams paid on 1 January covering 12 months.
(a) The purchase entry. (b) The 31 January entry. (c) The prepaid expense balance on 30 June. (d) If statements were prepared on 31 March with no adjustment at all, by how much would profit be overstated?

E4.3 — Depreciation (intermediate). Three assets: packing equipment 24,000 (4 years), a computer 9,600 (3 years, bought 1 February), warehouse shelving 18,000 (6 years, residual value 1,800, bought 1 April). Prepare a month-by-month depreciation schedule for the whole of 2026, and calculate the depreciation expense for the year and accumulated depreciation at 31 December.

E4.4 — The returns provision (intermediate→advanced). March sales are 180,000 dirhams (before tax), cost of goods sold is 62,000, the historical return rate is 6% by value, and the goods come back undamaged and resaleable. Write the two adjusting entries on 31 March, and calculate net revenue and gross profit after the provision.

E4.5 — Deferred revenue (advanced). The store launched a "coffee box" on a 3-month subscription at 945 dirhams including tax (900 + 45 tax), sold 200 subscriptions on 1 February, and ships the boxes at the start of each month.
(a) The sale entry on 1 February (separate the tax). (b) The end-of-February entry. (c) The deferred revenue balance on 31 March. (d) Why is the whole amount not recognised as revenue in February even though the money is in the bank?

5. Mini project — "Closing a month against the clock"

Deliverable: a complete January close file + a time-stamped close checklist.

What is required:

  1. Build the twelve-step close checklist as a sheet where you track: status, owner, reference document, date.
  2. Actually run Nuwa's January close: the three entries + producing the trial balance again.
  3. Add an adjustment impact table (before/after) as in the worked example.
  4. Add a "swing review" sheet: any account that moved more than 20% or went against your expectation, with one line of explanation for each.
  5. Time yourself: record how long it took you from opening the file to a balanced trial balance. The target: under 90 minutes.

Acceptance criteria:
- [ ] The three adjusting entries are correct in both accounts and directions.
- [ ] The trial balance after adjustment balances at 341,026.00.
- [ ] Net profit is exactly 24,312.00.
- [ ] The close checklist is complete, with a named reference document for every step.
- [ ] The swing review sheet holds at least 3 observations, each with a causal explanation rather than a descriptive one.

6. The test

9 questions · pass 7/9.

  1. A store collected 40,000 in January for orders that will ship in February. How much January revenue is there on the accrual basis?
  2. Why is advertising spend not capitalised even though its effect runs on for months?
  3. An asset costs 36,000, has a useful life of 5 years and a residual value of 6,000. Which one-month depreciation entry is correct?
  4. What is the difference between "accrued expenses" and "prepaid expenses" in terms of box and direction?
  5. A store records no adjusting entries at all. What is the real commercial effect?
  6. Why is depreciation added back in the cash flow statement?
  7. An annual subscription of 24,000 was paid on 1 April. What is the prepaid expense balance on 31 December?
  8. Where does the "returns provision" appear on the balance sheet, and which account faces it in the income statement?
  9. Why does reconciling the payment gateway and the platforms come before producing the trial balance rather than after it?

Pass mark 7 of 9.

7. Completion standard

# The standard The evidence
1 5/5 correct classifications in E4.1, with the type of adjustment named The exercise sheet
2 A complete and correct annual depreciation schedule for three assets with different purchase dates E4.3
3 A finished January close with a balanced trial balance and a profit of 24,312.00 The project file
4 A 12-step close checklist documented with reference documents The checklist sheet
5 The close completed in under 90 minutes The time log
6 Test score ≥ 7/9 The test sheet

Mastery level (optional): apply the close checklist to a real month from your own store. The odds are you will find at least two accounts whose book balance does not represent reality. Document them — those two accounts are the weak point of your accounting system, and they will come back every month until you fix what causes them.

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