Balancing off accountsBalancing off accountsBalancing off accountsBalancing off accounts

DBS3024 BUSINESS TRANSACTIONDBS3024 BUSINESS TRANSACTION

byStephen Ong

Visiting Fellow, Birmingham City University Business School

Visiting Professor, Shenzhen University

Today’s Overview Today’s Overview

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Learning objectivesLearning objectives

After this lecture, you should be able to:After this lecture, you should be able to: Close-off accounts when appropriateClose-off accounts when appropriate Balance-off accounts at the end of a Balance-off accounts at the end of a

period and bring down the opening period and bring down the opening balance to the next periodbalance to the next period

Distinguish between a debit balance Distinguish between a debit balance and a credit balanceand a credit balance

Describe and prepare accounts in Describe and prepare accounts in three-column formatthree-column format

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Why balance accounts?Why balance accounts?

T-accountsT-accounts need to be balanced need to be balanced at various times during the year:at various times during the year:

At the At the end of each accounting end of each accounting period period to summarise the to summarise the situation.situation.

Once a year Once a year to calculate profit.to calculate profit. To see To see what is happening what is happening with with

respect to a particular account.respect to a particular account.

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11Debtors accountDebtors account

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How to balance where How to balance where debtors debtors have paid their accountshave paid their accounts

This is the account of K. Tandy in This is the account of K. Tandy in August 2012:August 2012:

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How to balance where debtors have How to balance where debtors have paid their accounts (Continued)paid their accounts (Continued)

This is the balanced account:This is the balanced account:

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How to balance where How to balance where debtors still owe for goodsdebtors still owe for goods

This is the account of D. Knight in This is the account of D. Knight in August 2012:August 2012:

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How to balance How to balance where debtors where debtors still owe for goods still owe for goods (Continued)(Continued)

To balance, we will use a five-step To balance, we will use a five-step approach.approach.

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

2.2. Deduct the smaller total from the larger Deduct the smaller total from the larger total to total to find the balancefind the balance..

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

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How to balance How to balance where debtors where debtors still owe for goods still owe for goods (Continued)(Continued)

4.4. Enter Enter totals level totals level with each with each other.other.

5.5. Now enter the balance on Now enter the balance on the line below the totals on the line below the totals on the the oppositeopposite side side to the to the balance shown above the balance shown above the totals.totals.

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How to balance where How to balance where debtors debtors still owe for goodsstill owe for goods (Continued) (Continued)

This is the balanced account:This is the balanced account:

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22Creditors accountCreditors account

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Balancing a Balancing a creditor’s accountcreditor’s account

This is the account of E. Williams in This is the account of E. Williams in August 2012:August 2012:

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Balancing a Balancing a creditor’s creditor’s account account (Continued)(Continued)

This is the balanced account:This is the balanced account:

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33Three Column accountsThree Column accounts

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Three-column accountsThree-column accounts

Three-column accounts Three-column accounts do not use the do not use the format of the T-account.format of the T-account.

There are three columns and the There are three columns and the third third column provides a running total column provides a running total of the of the balance.balance.

Three-column accounts are very Three-column accounts are very similar to the bank statement similar to the bank statement you will you will receive for a current account.receive for a current account.

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An example of a three-column An example of a three-column accountaccount

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Learning outcomesLearning outcomes

You should have now learned:You should have now learned:

1.1. How to How to close off accounts close off accounts upon which upon which there is no balance outstandingthere is no balance outstanding

2.2. How to balance-off accounts at the How to balance-off accounts at the end end of a periodof a period

3.3. How to How to bring down the opening bring down the opening balance balance on an account at the start of a on an account at the start of a new periodnew period

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Learning outcomes (Continued)Learning outcomes (Continued)4.4. That when an opening balance on an That when an opening balance on an

account is a debit, that account is said to account is a debit, that account is said to have a have a debit balancedebit balance. It also has a debit . It also has a debit balance during a period whenever the total balance during a period whenever the total of the debit side exceeds the total of the of the debit side exceeds the total of the credit sidecredit side

5.5. That when an opening balance on an That when an opening balance on an account is a credit, that account is said to account is a credit, that account is said to have a have a credit balancecredit balance. It also has a credit . It also has a credit balance during a period whenever the total balance during a period whenever the total of the credit side exceeds the total of the of the credit side exceeds the total of the debit sidedebit side

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Learning outcomes (Continued)Learning outcomes (Continued)

6.6. That That ‘debtors’ ‘debtors’ are people or organisations are people or organisations whose account in your accounting books whose account in your accounting books has a has a greater value on the debit sidegreater value on the debit side. They . They owe you money. They are included in the owe you money. They are included in the amount shown for amount shown for accounts receivable accounts receivable in in the statement of financial positionthe statement of financial position

7.7. That That ‘creditors’ ‘creditors’ are people or organisations are people or organisations whose account in your accounting books whose account in your accounting books has a has a greater value on the credit sidegreater value on the credit side. You . You owe them money. They are included in the owe them money. They are included in the amount shown for amount shown for accounts payable accounts payable in the in the statement of financial positionstatement of financial position

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Learning outcomes (Continued)Learning outcomes (Continued)

8.8. That T-account and three-column That T-account and three-column accounts disclose the accounts disclose the same balancesame balance, , given identical information about given identical information about transactionstransactions

9.9. That three-column accounts update That three-column accounts update and show the balance on the account and show the balance on the account after after every transactionevery transaction

10.10.How to prepare three-column How to prepare three-column accountsaccounts

Resources : Core ReadingResources : Core Reading

Wood, Frank and Robinson, Sheila Wood, Frank and Robinson, Sheila (2009) (2009) Bookkeeping and Accounts Bookkeeping and Accounts ,7,7thth Edition, Pearson/ FT Prentice HallEdition, Pearson/ FT Prentice Hall

Wood, Frank and Sangster, Alan (2012) Business Accounting ,12th Edition, Pearson/ FT Prentice Hall

Fortes, Hilary (2011) Accounting Simplified , Pearson/ FT Prentice Hall

QUESTIONS?QUESTIONS?