Balancing accounts (AS Level) Financial accounting

 

Balancing an account is defined as the process of finding which side of a ledger account is the greater.

 Purpose of Balancing Accounts

Accounts must be balanced at some point during the trading period. The primary purposes of balancing accounts are to determine the outcome of the transactions recorded therein:

• Cash and Bank: To determine how much money is left in the bank account or how much cash the business holds.
• Liabilities: To determine how much the business owes other people.
• Assets/Receivables: To determine how much the business is owed.
• Activity Totals: To determine how much has been received from, or spent on, various activities.

 Procedure: How to Balance an Account

The procedure for balancing a standard ledger account is straightforward:

1. Add the Sides: Add the amounts recorded on each side of the account to find which has the lesser total.
2. Insert the Balance: Insert the amount necessary (the balancing figure) on the side with the lesser total to make both sides equal (or, in other words, balance). This amount is typically labelled "Balance carried down" (c/d).
3. Carry Down the Balance: Insert the total on each side of the account, and then carry the balancing figure down to the opposite side of the account on the next day. This new entry is labelled "Balance brought down" (b/d).

The dates are considered important details and must be included.

 Key Balances and Their Meaning

The resulting balance after this process indicates the status of the account:

Balance Type	Definition	Accounting Meaning	Example
Debit Balance	The amount by which the debit side (left-hand side) of an account is greater than the credit side.	The business is owed this amount, or this represents an asset or expense.	A customer's account showing they owe the business (they are a 'debtor').
Credit Balance	The amount by which the credit side (right-hand side) of an account is greater than the debit side.	The business owes this amount, or this represents income or capital.	A supplier's account showing the business owes them money (they are a 'creditor').

In the case of a bank account, a debit balance shows how much money is left in the bank.

Handling Accounts with Minimal Entries

• If an account has only one entry on each side and they are of equal amount, the account is simply ruled off.
• If an account has an entry on one side only (e.g., a supplier's account showing only a purchase), the total amount is still entered as the "Balance c/d" on the opposite side to balance it, and then brought down as the "Balance b/d" on the side where the initial entry occurred.

 Balancing the Cash Book

Balancing the three-column cash book is an important task. The process follows the standard steps above, but with one critical distinction: the discount columns are not balanced. The totals of the discount columns are instead carried to the respective discounts allowed and discounts received accounts.

 When Accounts Are Balanced

The frequency of balancing accounts varies depending on the type of account:

• Cash Book: Usually balanced at frequent intervals because knowing the bank balance is consistently important. This may be weekly in small businesses or daily in larger ones.
• Customers and Suppliers Accounts: Balanced monthly to align with the practice of sending and receiving statements of account. These statements help customers reconcile their accounts with their suppliers, serving as a reminder that outstanding balances are due.
• Other Accounts: Generally balanced as and when required, which is always when a trial balance is being prepared. (The trial balance preparation itself requires balancing all ledger accounts first.)