Balancing/ Closing of Accounts
In Accounting Journals all transactions are entered in chronological order by date. These transactions are summarized and posted to the Ledgers periodically with appropriate frequency.
Recording transactions and posting them in summarized forms into Ledgers, complete the two initial components of the accounting process i.e. Recording and summarizing financial transactions.
Now before moving towards the next stage in the accounting process i.e. Reporting, we will read how to complete the fifth step of the accounting cycle i.e. Balancing & Closing of accounts/ Ledgers before each reporting period.
Balancing of Ledgers/ Accounts
Balancing and closing of accounts/ ledgers also provides the opportunity to know the exact balances of each ledger account.
While balancing and closing of accounts both the debit and credit columns of each ledger are totaled and by netting both with each other we have the balance of each ledger.
What does debit balance means in accounting?
During the closing of accounts, if we have a debit side greater than the credit side, the excess amount of the debit side is called to be the “Debit Balance” of that account.
For example, if the total of sales (debit side) of our customer M/s Tom & Co during the period of December, 2X20 is $ 1,000 and a total of receipt (credit side) is $850, then we can say that account of M/s Tom & Co. have “debit balance of $ 150”.
What does Credit balance means in accounting?
Similarly, if the total of credit side is greater than the debit side of the ledger at the time of the closing of accounts, the excess amount of credit side to be called “Credit Balance” of that ledger.
For example, if the total of purchases (credit side) of our supplier M/s New Horizon during the period of December, 2X20 is $ 1,500 and the total of payment made to them (credit side) is $950, then we can say that account of M/s New Horizon has “credit balance of $ 550”.
Closing of Accounts
After balancing the both debit and credit sides, ledgers are closed. The balances of the ledgers which will be reported in the balance sheet are carried forward to the next accounting period, whereas the balances of ledgers, of income, and expense nature are closed and their balance is transferred to the trading and Profit and Loss account.
The treatment of each account at the time of closing depends upon the nature of each ledger/ account.
Closing Personal & Real Ledgers
Personal and real Accounts become part of the balance sheet, therefore balances of these accounts at each accounting period end are carried forward to the next period.
Hence, at the time of closing, if we have a debit balance for a real or personal account, we make an entry on the credit side (credit entry) of that account by the balance amount along with the “C/D” or “C/F” in the description.
Similarly, at the time of closing, if we have a credit balance for a real or personal account, we make an entry on the debit side (debit entry) of that account by the balance amount, along with the “C/D” or “C/F” in the description.
While opening ledgers in the next accounting period, the ledgers with debit balance in the last period, are debited with the carried forward amount with “B/D” or “B/F” in the description. Likewise, the ledgers with the credit balance in the last accounting period, are credited, while opening ledgers in the next period, with the “B/D” of B/F” is described.
Note: C/D is the denotation for Carried Down, C/F is for Carried Forward. Similarly, B/D is the denotation for Brought Down and B/F is for Brought Forward.
Closing Nominal Ledgers
On the other hand, nominal accounts are of income and expense nature, therefore all nominal accounts are closed and the balances of such accounts are transferred to Trading and Profit & Loss accounts.
At the time of closing, if we have a debit balance of a nominal ledger, the balance amount is entered in the credit side of that ledger with the description of “By trading OR Profit & Loss account”. further, a corresponding debit entry in Trading OR Profit & Loss Account with the description of “To name of ledger being closed”.
Similarly, at the time of closing of a credit balance of a nominal ledger, the balance amount is entered in the debit side of that ledger with the description of “To trading OR Profit & Loss account”. further, a corresponding credit entry in Trading OR Profit & Loss Accounts with the description of “By name of ledger being closed”.
From both closing methods, we can clearly see that the debit balance of any ledger is always debited in the corresponding ledger (be it opening of the next accounting period OR profit and loss account). Likewise, if we have a credit balance of any ledger, at the time of closing, the corresponding ledger (be it opening of the next accounting period OR profit and loss account) is always credited.
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