Balancing off accounts

Balancing off accounts

Learning objectives

After you have studied this chapter, you should be able to: l close accounts when appropriate l balance off accounts at the end of a period and bring down the opening balance

to the next period l distinguish between a debit balance and a credit balance l describe and prepare accounts in three-column format

Introduction

In this chapter, you’ll learn how to discover what the amount outstanding on an account is at a particular point in time. You’ll also learn how to close accounts that are no longer needed and how to record appropriate entries in accounts at the end and beginning of periods. Finally, you’ll learn that T-accounts are not the only way to record accounting transactions.

5.1 Accounts for debtors Where debtors have paid their accounts

credit entries. At the end of each accounting period the figures in each account are examined in

So far you have learnt how to record transactions in the accounting books by means of debit and

order to summarise the situation they present. This will often, but not always, be a year if you are calculating profit. It will be at least once a month if you want to see what is happening with respect to particular accounts. Probably the most obvious reason for this is to find out how much our customers owe us for goods we have sold to them. In most businesses this is done at the end of each month.

Activity

5.1 Why do you think we would want to look at the debtor accounts in the accounting books as often as once a month?

Part 1 l Introduction to double entry bookkeeping Let’s look at the account of one of our customers, K Tandy, for transactions in August 20X6:

K Tandy

144 Aug 19 Sales

Aug 22 Bank

300 If you add up the figures on each side, you will find that they both sum to £444. In other words,

Aug 28 Bank

during the month we sold a total of £444 watch of goods to Tandy, and have been paid a total of £444 by her. This means that at the end of August she owes us nothing. As she owes us noth- ing, we do not need her account to prepare the balance sheet (there is no point in showing a figure for debtors of zero in the balance sheet). We can, therefore, close off her account on

31 August 20X6. This is done by inserting the totals on each side:

K Tandy

144 Aug 19 Sales

Aug 22 Bank

Aug 28 Bank

444 Notice that totals in accounting are always shown with a single line above them, and a double

line underneath. As shown in the following completed account for C Lee, totals on accounts at the end of a period are always shown on a level with one another, even when there are less entries on one side than on the other.

Now, let’s look at the account for C Lee.

C Lee

20X6

£ Aug 11 Sales

20X6

480 Aug 19 Sales

Aug 30 Bank

Aug 22 Sales

480 In this account, C Lee also owed us nothing at the end of August 20X6, as he had paid us for all

the sales we made to him.

Note: In handwritten accounts, you will often see this layout enhanced by two intersecting lines, one horizontal and one diagonal on the side which has less entries. If this were done, C Lee’s account would look like this:

C Lee

20X6

£ Aug 11 Sales

Aug 30 Bank

We won’t use this layout in this book, but your teacher or lecturer may want you to use it whenever you are preparing T-accounts.

Activity

5.2 Why do you think we would want to draw these two extra lines onto the hand- written account?

Chapter 5 l Balancing off accounts If an account contains only one entry on each side and they are equal, you don’t need to

include totals. For example:

K Wood

20X6

£ Aug 6 Sales

20X6

Aug 12 Bank

Now let’s look at what happens when the two sides do not equal each other.

Where debtors still owe for goods

It is unlikely that everyone will have paid the amounts they owe us by the end of the month. In these cases, the totals of each side would not equal one another. Let’s look at the account of

D Knight for August 20X6:

D Knight

158 Aug 15 Sales

1 Sales

Aug 28 Bank

Aug 30 Sales

If you add the figures you will see that the debit side adds up to £482 and the credit side adds up to £158. You should be able to see what the difference of £324 (i.e. £482 – £158) represents. It consists of the last two sales of £206 and £118. They have not been paid for and so are still owing to us on 31 August 20X6.

In double entry, we only enter figures as totals if the totals on both sides of the account agree. We do, however, want to balance off the account for August showing that Knight owes us £324. (While there would be nothing wrong in using the term ‘close off’, ‘balance off’ is the more appropriate term to use when there is a difference between the two sides of an account.)

If Knight owes us £324 at close of business on 31 August 20X6, then the same amount will be owed to us when the business opens on 1 September 20X6. Balancing the accounts is done in five stages:

1 Add up both sides to find out their totals. Note: do not write anything in the account at this stage.

2 Deduct the smaller total from the larger total to find the balance.

3 Now enter the balance on the side with the smallest total. This now means the totals will be equal.

4 Enter totals level with each other.

5 Now enter the balance on the line below the totals on the opposite side to the balance shown above the totals.

Against the balance above the totals, complete the date column by entering the last day of that period – for August, this will always be ‘31’ even if the business was shut on that date because it fell on a weekend or was a holiday. Below the totals, show the first day of the next period against the balance – this will always be the day immediately after the last day of the previous period, in this case, September 1. The balance above the totals is described as the balance

carried down (often this is abbreviated to ‘balance c/d’). The balance below the total is described as the balance brought down (often abbreviated to ‘balance b/d’).

Part 1 l Introduction to double entry bookkeeping Knight’s account when ‘balanced off’ will appear as follows:

Note for students

l From now on, we will use the abbreviations ‘c/d’ and ‘b/d’. l The date given to balance c/d is the last day of the period which is finishing, and balance b/d is

given the opening date of the next period.

l As the total of the debit side originally exceeded the total of the credit side, the balance is said

to be a ‘debit balance’ . This being a personal account (for a person), the person concerned is said to be a debtor – the accounting term for anyone who owes money to the business.

Just as when the two sides each have only one entry and the two sides are equal, if an account contains only one entry it is unnecessary to enter the total after entering the balance carried down (because the balance becomes the only entry on the other side and it is equal to the other entry). A double line ruled under the entry will mean that the entry is its own total. For example:

B Walters

20X6

£ Aug 18 Sales

20X6

51 Aug 31 Balance c/d 51 Sept

1 Balance b/d

Note: T-accounts should always be closed off at the end of each period, even when they contain only one entry.

5.2 Accounts for creditors

Exactly the same principles will apply when the balances are carried down to the credit side. This

balance is known as a ‘credit balance’ . We can look at the accounts of two of our suppliers which are to be balanced off:

E Williams

20X6

£ Aug 21 Bank

Aug 18 Purchases

K Patterson

20X6

£ Aug 14 Returns outwards

20X6

620 Aug 28 Bank

Aug 15 Purchases

Chapter 5 l Balancing off accounts We now add up the totals and find the balance, i.e. Stages 1 and 2. When balanced off, these will

appear as:

K Patterson

20X6

£ Aug 14 Returns outwards

20X6

620 Aug 28 Bank

20 Aug

8 Purchases

200 Aug 31 Balance c/d

Aug 15 Purchases

1 Balance b/d 200

The accounts of E Williams and K Patterson have credit balances. They are ‘creditors’ – the accounting term for anyone to whom money is owed.

Before you read further attempt Review Questions 5.1 and 5.2.

5.3 Three-column accounts

Through the main part of this book, the type of account used is the T-account, where the left- hand side of the account is the debit side, and the right-hand side is the credit side. However, when computers are used the style of the ledger account is sometimes different. It appears as three columns of figures, one column for debit entries, another column for credit entries, and the last column for the balance. If you have a current account at a bank your bank statements will normally be shown using this three-column format method.

The accounts used in this chapter will now be redrafted to show the ledger accounts drawn up in this way.

K Tandy

Balance (and whether debit or credit) 20X6

144 Dr Aug 19 Sales

444 Dr Aug 22 Bank

300 Dr Aug 28 Bank

Part 1 l Introduction to double entry bookkeeping

C Lee

Balance 20X6

Debit

Credit

£ Aug 11 Sales

177 Dr Aug 19 Sales

380 Dr Aug 22 Sales

480 Dr Aug 30 Bank

K Wood

Balance 20X6

214 Dr Aug 12 Bank

D Knight

Balance 20X6

158 Dr Aug 15 Sales

364 Dr Aug 28 Bank

206 Dr Aug 31 Sales

B Walters

Balance 20X6

Debit

Credit

£ Aug 18 Sales

51 51 Dr

E Williams

Balance 20X6

248 Cr Aug 18 Purchases

364 Cr Aug 21 Bank