UNIVERSITY OF TECHNOLOGY, JAMAICA

SCHOOL OF BUSINESS ADMINISTRATION

Fundamentals of Accounting
RECORDING FINANCIAL TRANSACTIONS PART 2

BALANCING OFF THE ACCOUNTS

After all the transactions have been posted for the given accounting period, the accounts must be closed or
balanced off. This is done on a periodic basis, usually monthly.

To balance the accounts involves bringing both the debit and credit columns to an equal total. It is necessary to
balance the accounts because the balance of the account has great implications for the overall position of the
business. For example, the balance on the bank account could either be a debit or a credit, but each balance tells
a different story concerning the cash in the bank and the overall financial position of the business. A debit
balance indicates that the business has cash in the bank and this balance would be classified as an asset.
However, a credit balance would indicate an overdraft, and this would mean that the business owes the bank.
Hence, that bank balance would have been a liability. The balances on the accounts indicate to us what are
assets, liabilities, equity, expenses and revenues of the business at a particular date. Collectively, we use these
balances to state the profitability and overall financial position of an enterprise.

The procedure for balancing off the accounts can be explained as follows:

a) Make a rough check of the sum in both columns of each account. In so doing, determine if any side is
lesser in value than the other
b) If one column is lesser in total, insert the difference as an entry called “balance carried forward”, or
“balance c/f” for short.
c) Total both sides of the account which should now be of an equal value enter their sum on the same
horizontal line with a double line underneath.
d) The amount that was used to close the account, i.e. the balance carried forward, must be used to open
the account on the opposite side for the start of the next accounting period. This entry is called the
“balance brought forward”, or “balance b/f”
e) Note that if both sides of the account were of the same sum, there would not be a need for a balance c/f.
Instead, both sides of the account are simply tallied with their sum entered on the same horizontal line
with a double line underneath.

We could say that the process of balancing off is one of double entry: if the balance that has been carried
forward is a debit, then the balance brought forwards will be a credit and vice versa. The act of balancing
the account transfers the account balance from one period to the next.

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Before balancing

Dr Cash Account Cr
June June
2 Bal b/d 4,000 4 Stationery 2,500
4 I. Kenny 12,500 8 Rent 4,500
18 Sales 34,500 10 Wages 15,000
27 Commission Earned 12,000 17 Insurance 3,000
20 G. Blackthorn 7,000
29 Office Supplies 2,500

Account after balancing: note that the changes have been highlighted

Dr Cash Account Cr
June June
2 Bal b/d 4,000 4 Stationery 2,500
4 I. Kenny 12,500 8 Rent 4,500
18 Sales 34,500 10 Wages 15,000
27 Commission Earned 12,000 17 Insurance 3,000
20 G. Blackthorn 7,000
28 Office Supplies 2,500
30 Balance c/f 28,500
------------- ------------
63,000 63,000
======= =======
July
1 Balance b/f 28,500

Note the following:

1. The balance carried forward is dated at the month end where as the balance brought forward is at
the beginning of the next month.

2. The total lines must be drawn on the same level so that the accounts also looks balanced.

3. The balance of the account is determined by the balance brought forward; not the balance carried
forward. For the above example cash has a debit balance of $28,500.

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 THE TRIAL BALANCE

After all the transactions have been posted, and the accounts balanced off, a Trial Balance may then be
prepared.

This is a statement that shows all the accounts in use at the end of the accounting period, with their respective
debit or credit balance, i.e. the balance brought forward

It is the balance that has been BROUGHT FORWARD that is taken to the trial balance on the side (debit or
credit) that the brought forward is on.

PURPOSES OF THE TRIAL BALANCE

There are two main purposes for the preparation of the Trial Balance:

a) It serves as an interim check of the accounts in order to ensure that the double entry was maintained
when posting the transactions. Thus the debit column of the trial balance must be equal to the credit
column.

Generally, the debit column shows the balances on accounts for assets and expenses, while the credit
column shows balances on accounts for revenue and liabilities.

b) Since all the accounts are scattered in the various ledgers, the Trial balance brings them to a concise
listing. This makes it easier for the preparation of the final accounts, i.e. the statement of profit or loss
and the statement of financial position.

FORMAT FOR THE TRIAL BALANCE

The Trial Balance must have a heading that shows

- The name of the entity

- The title of the statement

- The date in consideration

The outline of the Trial Balance is as follows:

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 NAME OF THE ENTITY
TRIAL BALANCE
AS AT DECEMBER 31, 2012

ACCOUNT DETAILS DR CR
Loan 30,000
Capital 61,860
Sales 145,200
Drawings 4,500
Carriage Inwards 2,050
Carriage Outwards 4,750
Return Inwards 3,200
Return Outwards 4,035
Insurance 4,600
Stock at Jan 1, 2012 23,470
Rates 3,120
Building 45,000
Motor Vehicle 30,500
Fixtures & Fittings 8,250
Purchases 102,340
Rent 5,000
Commission Received 12,300
Office Expense 6,320
Interest Received 3,750
Bank 12,250
Cash 6,407
Debtors 6,230
Creditors 10,842

267,987 267,987
========= ========

Footnote:
a) Stock at December 31, 2012 is 30,000

Note that the opening stock is included in the trial balance as a debit item because it would have been treated a
Current Asset in the last statement of financial position.

However, the Closing Stock is listed as a footnote because it was not obtained as a double entry calculation as
we are using the periodic system of recording inventory. It will be used, though when preparing the final
accounts as we shall see later.