Accounts balancing/balancing of a refers to bringing the debit and credit sides of a particular account into balance. It is basically the process of determining the closing balance of each account so that the accounts can be accurately presented in the financial statements.
The difference between the total amount on the debit side and the credit side of an account is called the surplus of that account. If the sum of the debit side of the account is greater than the sum of the credit side on a particular date, it is called a debit surplus. On the other hand, if the sum of the credit side of an account is greater than the sum of the debit side, it is called a credit surplus. And if the sum of the debit and credit sides is equal, it is called zero surplus. The surplus determined at the end of the accounting period is called the closing surplus. The closing surplus becomes the opening surplus of the next accounting period.
Needs to Determine Balance of Accounts
There are multiple requirements for determining the balance of accounts. These are discussed below:
1) Cash Control: The surplus of the cash account and the cash on hand must be matched. Otherwise, discrepancies and embezzlement are not detected. Drawing the balance is necessary for cash control.
2) Arithmetic Accuracy: To check the arithmetic accuracy of the accounts and to prepare the trial balance, the surplus of the accounts must be determined.
Determination of Results: The surplus of the accounts and the preparation of statements determine the business results. Therefore, drawing the balance is necessary to determine business results.
3) Debts and Receivables: The amount of debts and receivables is known from the surplus of personal accounts. Therefore, drawing the balance is necessary to know the exact amount of debts and receivables.
4) Amount of Assets: To find out the amount of assets of the business, the surplus of the accounts must be determined. The surplus of these accounts is also required to prepare the balance sheet.
Rules of Balancing
1) Determining the Sum and Difference of Both Sides of an Account: First, the total amount on both the debit and credit sides of the account must be summed, and the difference between these totals must be calculated. This difference is known as the account balance.
2) Equalizing the Totals of Both Sides: The side with the higher total amount should have this larger amount written as the total on both sides of the account. Next, the difference between the two totals should be placed on the side with the smaller total, and it should be noted that this balance is being carried forward. This process ensures that the totals of both sides are equal.
3) Closing the Account: After determining the account balance, two equal lines (=) should be drawn under the totals of both sides to indicate that the account is closed.
4) Transferring the Account Balance: After closing the ledger account on a specific date, the balance from that date should be shown on the opposite side on the next date, indicating that the balance has been carried forward.
5) Accounts Surplus/Balance:
a) Debit Surplus:
When the sum of the debit side of an account exceeds the sum of the credit side, the resulting surplus is referred to as the debit surplus. The debit surplus is then entered on the credit side to balance the account.
b) Credit Surplus:
On the other hand, when the sum of the credit side of an account exceeds the sum of the debit side, the resulting surplus is called the credit surplus. The credit surplus is entered on the debit side to achieve a balanced account.
c) Closing Surplus:
At the end of an accounting period, the surplus that is determined is called the closing surplus. This surplus is recorded with a note indicating that it will be transferred to the next period.
d) Opening Surplus:
When a new accounting period begins with the surplus carried forward from the previous period, it is referred to as the opening surplus. The opening surplus is recorded with a note indicating that it has been transferred from the previous period.
Interpretation of Significance of Account Balances
1) Personal account: Personal account can be either debit or credit surplus. Debit surplus refers to what a business owes to a person or organization. It is a business asset. For example: miscellaneous debtors.
2) Real Accounts or Asset Accounts: There is usually a debit surplus of this accounts. For example: cash account, equipment account etc.
3) Liability Accounts: Liability related accounts such as Debt Accounts, Bills Payable Accounts etc. always have a credit surplus. There is never a debit surplus.
4) Nominal Account: Nominal account can be both debit or credit surplus, i.e. expenses, losses, damages, salary account, purchase account, depreciation account etc. accounts indicate debit surplus. On the other hand, income or profit accounts always show a credit surplus, i.e. commission account, dividend account, sales account etc. Generally, a debit surplus in a nominal account represents expenditure and a credit surplus represents income.
More Resources
Thank you for reading our resources on the Balancing Accounts. Enhancing your knowledge more and progressing in your career, you may find the following guides helpful: