Balancing the Accounts and Necessity of Ledger
January 2, 2018
Balancing the Accounts
Whenever it is desired to balance an account, the two sides are added up, and if the totals of the two sides are unequal then the difference is put on the side having lesser total. This will make both the sides equal. The amount of the difference inserted is known as ‘balance’ of the account. In particulars column it is written as Balance c/d (carried down). In subsequent period it is known as Balance bid (brought down). If the total of the credit side of the account is less, the balance will be inserted on credit side with the words “By Balance c/d”. This balance is known as Debit Balance and after closing the account it will be shown on the debit side with the words “To Balance bid”. Similarly if the total of debit side of the account is less, the balance will be inserted on debit side with the words “To Balance c/d”. This balance is known as Credit Balance and after closing the account it will be shown on the credit side with the words “By Balance bid”.
It is worthwhile to refresh your memory and recall that personal accounts relate to individuals and business entities (firm; company, corporation etc.) and the rule is : Receiver is to be debited and giver is to be credited. Now if on any particular date the business wants to know as to how much amount is ‘due to’ or ‘due by’ a particular person to itself (business) then it should balance the account of the person concerned. Debit balance as per personal account signifies that the person is the debtor of the business i.e. person owes an amount equal to the balance to the business or the amount, represented by the balance is ‘due to’ the business by the person. Similarly, Credit balance as per personal account signifies that the person is the creditor of the business i.e. business owes an amount equal to the balance to the person or the amount represented by the balance is ‘due by’ the business to the person.
These are the accounts relating to property or possession or rights. Rule is : “What comes in is to be debited and what goes out is to be credited.” Thus all incomings are to be recorded on the debit side and outgoings on the credit side. On any particular date these accounts should have ‘debits balance’ representing the worth of the item covered by the account. At the end of the year (generally) or at any other point of time when the financial position of the business is required to be ascertained these accounts are balanced. These balances are shown on the assets side of the statement of position or Balance Sheet. These accounts do have ‘debit balance’ which signifies the ‘book-value’ or ‘written down value’ or ‘going concern-value’ of the assets of the business as on that relevant date.
These are the accounts showing the various heads of expenses and sources of income. At the end of the specified period (generally one year) these accounts are closed by transfer to the final accounts i.e. Trading or Profit and Loss Account.
Necessity of Ledger
Maintaining of ledger is a must in every accounting system. It is necessary as will be clear from its advantages:
(1) Transactions relating to a particular person, item or heading of expenditure’ or income are grouped in the concerned account at one place.
(2) When each account is periodically balanced it reflects the net position of that account. For example, how much is due from a customer or how much is payable to a supplier or what is the value of total purchases or what has been the expenditure on salaries? Such information is available by balancing the ledger accounts.
(3) Ledger is the stepping stone for preparing Trial Balance- which tests the arithmetical accuracy’ .of the accounting books.
(4) Since the entries recorded in the journal are referenced into ledger the possibility of errors or defalcations are reduced to the minimum.
(5) Ledger is the destination of all entries made in journal or sub-journals.
(6) Ledger is the “store-house” of all information which subsequently is used for preparing final accounts and financial statements.
Opening entry and its posting. In the case of an existing business we are required to pass an entry in the journal (on the basis of the Balance Sheet prepared at the end of the previous year) for bringing in the new books all assets and liabilities: this is known as Opening entry.