Mainstays of Accounting: Balancing Off Accounts
Balancing accounts is an ever-present step in annual accounting cycles. This is typically one of the last things to do before financial statements are completed. The main purpose for balancing is to pinpoint a business’s financial standing at a given point in time. As such, it is obvious why balances and properly balancing accounts are important for businesses.
What is A Balance?
A balance is a number that shows the same figures that must be seen in both columns of a ledger. Usually, it presents as a discrepancy showing the difference between column A and column B. This number is objectively the most vital point in an account since it is where most businesses see their strength or weakness. Some of the factors to consider in balancing accounts are company capital, income, expenses, assets, and even liabilities.
Moreover, a balance can be further defined by two specific labels: debit balance and credit balance.
- Debit Balance – This happens when the total of an account’s debit column is larger than the total credit.
- Credit Balance – Opposite to debit balance, credit balance is applicable when the credit side sum is bigger.
In case of a solitary entry in an account, it automatically fills the role of balance or difference. Balancing a single-entry account, while seemingly pointless, is still done so that all of the business’ records are noted and reported. In the spirit of further understanding balances, let us also define account in accounting and comprehend the definition of an account balance.
The word account pertains to a business’s record of financial activities, all documented in the company’s accounting system. All actions involving money are tracked for regulation and monitoring; these activities include company assets and liabilities, revenue, expenses, etc.
Account balances refer to the money tucked away in an account. This applies to all amounts present in the account at a given point in time, including negative sums. The account balance is the remaining balance left after both credits and debits are factored in.
While account balances are usually in the positive spectrum, those that fall below zero indicate some debt. This negative balance is called a net debt and may be the result of overdraft fees. Some instances where overdrafts happen are for automatic bill payments or when a cheque exceeding the account balance is credited. Banks usually charge fees for these incidences.
Balancing Off Accounts Process
Most ledgers have multiple entries to account for. Despite this, learning how to balance an account is a fairly straightforward task. The process for balancing off accounts can be done by following these steps:
- Step One: Compute the total amount of each of the two columns in the account.
- Step Two: In case the numbers do not match, find the larger total between the two sums. Input that figure and label it as “total” at the bottom of each column.
- Step Three: Find any inconsistencies between the data in both columns. To calculate the discrepancy between the sums of each column, subtract the smaller from, the larger amount. For example, if column A is $1000 and column B is $200, you want your computation to equal $800.
- Step Four:When the deviant figure is found, it must be entered in the column with the lesser amount. This is done to make both columns equal, aka balanced. The balanced amount becomes the “balance carried forward” (balance c/f).
- Step Five: The balance c/f will consequently carry forward as the opening balance of the next accounting cycle. To signify this, the figure’s label will be changed into “balance brought forward”. The balance b/f is entered into the column with the larger amount.
- Step Six: After step five, where the balance is forwarded, a new accounting page will be created for the next cycle. The opening balance of the new page is now called balance brought forward (balance b/f) because it was brought forward from the last entry. Repeat the cycle from step one when new data is recorded.
Example of Balancing Off Accounts
Visualizing concepts can be difficult to do. So, to better understand how to balance an account, we will use Company Y’s monthly financial report. Assume that this was the company’s accounting data for the month of February:
|COMPANY Y’S FEBRUARY REPORT|
Going off of the above-discussed balancing process, first, we total the amounts from both columns. Column A (debit) sums into 4450, while column B (credit) has 3580. Obviously, 4450 is the larger number and will serve as the “total”.
Next, find the discrepancy by subtracting 3580 from the sum on the higher column (4450 – 3580 = 870). Once you get 870 from your computation, encode it under the column with the smaller sum. In this case, enter it under the credit column, labeling it as balance c/f.
Following this, we are now at step five. This is when the balance c/f amount is entered under the larger column and is re-labeled as balance b/f. It is now the closing balance for this term. The balance brought forward will begin the succeeding accounting cycle and be recorded accordingly on a new page.
To illustrate how the next period’s account is balanced with the balance b/f, refer to the following table:
|COMPANY Y’S MARCH REPORT|
Balancing Off Accounts with A Credit Balance
Remember that getting a credit balance on a company’s financial report is only possible when the credit column totals a larger amount than the debit column. When this happens, the process for balancing accounts with a credit balance follows the same process as those without credit balances. Let us once more look at Company Y’s records:
|COMPANY Y’S MARCH REPORT|
Looking at the sample table, only the placements of the balance c/f and balance b/f have changed compared to previous tables. Since the credit column now has a larger total than the debit, its sum is used as the total for this report. Then, the debit sum is subtracted from the total. The difference from that calculation is inputted as the new balance c/f, found under the debit column. The balance brought forward now shifts to the credit side and will be forwarded onto the next term.
Permanent and Temporary Accounts
Accounts are typically classified as either permanent or temporary. Just by the names, the difference between the two types can be inferred: temporary accounts last only for a short time, while permanent accounts last longer.
The aim set for temporary accounts is to have them closed by the end of a set interval. Companies reset temporary accounts, maybe yearly or according to a different standard chosen by the organization. When a temporary account is closed, a new account is created. Usually, accounts like this are for recording revenue, rent, earned interest, utilities, and other expenses. These kinds of accounts can help businesses see their general financial standing within a period, especially for annual income and expenses.
Permanent accounts are meant to last for prolonged periods. They exist to record a company’s long-term financial progress and activities. Instead of zeroing out like temporary accounts, figures in permanent accounts are transferred over to the succeeding term. A fresh accounting cycle for permanent accounts is usually started by the balance brought forward from the preceding period. Uses for a permanent account are for inventory, loans, equity, etc.