Balancing off of the accounts of a company takes place at the end of an accounting period. For most of the companies an accounting period is a year, but it can be shorter or longer. This can happen when a company changes its accounting period or when a business ceases trading half way through the year. It may happen earlier, for instance at the end of each month to ascertain certain things. The owners or management will want to examine figures in accounts in order to ascertain the situation of the organization. The major reason for this may be to ascertain the profit of losses the business has made.The other most evident reason for this is to find out how much our customers owe us for goods we have sold to them or how much we owe our suppliers for goods bought by us. These accounts are observed at least once a month in order to follow up with slow paying customers and to make sure creditors are paid on time to avoid penalties. For this reason the accounts need to be balanced off. Knowing the balances is also important because you will need to create a trial balance and a Balance Sheet at the end of an accounting period using the balances outstanding at the end of the period. Balancing off accounts will reduce the workload significantly since you will not have to transfer individual entries within each account separately , instead the balance of each account can be transferred to the trial balance (You will learn about trial balance later in the study session). Let’s look at how the accounts are balanced off. Let’s assume that we made sales of $120 and $250 on March 1 and March 9 respectively to one of our customer "Giovanni Cupello" and received full payment from him before the end of the period on March 10 and March 20. This is how the account of this customer will look like:
Summing up the figures on each side you will learn that they both amount to $370. Ths means that during the month of March we sold a total of $370 worth of goods to Giovanni Cupello and have been paid a total of $370 by him. Therefore at the end of the month Giovanni owes us nothing. Since there is nothing owed to us by him, we do not need to show his account in the Balance Sheet as there is little point in showing a figure for debtors of zero in the balance sheet. This means we can close his account off on 31 March 2010. We will do this by inserting the totals on each side of the account:
The totals must be shown with a single line above them, and a double line below them. Keep in mind that totals are always shown at the same level, even when there are fewer entries on one side of the account. Let us look at an example to illustrate this point.
Example
Just like the previous example, in this example our customer Courtney owes us nothing since she paid us for all the sales we made to her.
If an account two entries of equal amount on each side, there is no need to include totals. All you need to do is draw double lines below them. Let us look at an example to illustrate the point.
Example
It is possible that some debtors may not have paid us by the end of the month. In this case, the totals of each side would not equal one another.
Example
If you add the figures on the debit side, you will see that they add up to $755 and the figures on the credit side add up to $105. The difference of $650 ($755 - $105) represents the last two sales of $150 and $500 which have not been paid for and are still owied to us on 31 May 2010. The way it works in double entry is that we only enter figures as totals if the totals on both sides of the account are in agreement. Therefore Spencer’s account will be balanced off at the end of May using the following steps:
1
Add both sides and subtract the smaller total from the larger total
2
Enter the balance on the side with the smaller total. (The totals will now be equal)
3
Make sure that you have entered the totals on the same level on each side of the account.
4
Enter the the balance entered in step 2, on the opposite side, below the total.
Add a date before the balance above the total using the last day of that period - for instance for May, this should be '31'. Show the first day of the next period before the balance below the total- this should be the day right after the last day of the previous period. In our case this is June 1. The balance above the total is called the “balance carried down”(abbreviated as 'balance c/d'). It is also called balance carried forward in some jurisdictions. The balance below the total is described as the “balance brought down”(abbreviated as 'balance b/d'). It is also called balance brought forward in some jurisdictions.
Spencer's account when 'balanced off' will appear as follows:
Where the total of the debit side exceeds the total of the credit side, the balance is called a 'debit balance'. Where the total of the credit side exceeds the total of the debit side, the balance is called a 'credit balance'. The above case is an example of debit balance. As previously explained, when the two sides of an account have a single entry and both are numerically equal, there is no need to enter the total below the balance carried down. To demonstrate that the entry is it's own total, a double line is ruled under the entry. For example:
