Descripción del negocio

This lesson deals with the practical matter of the layout of accounts, including an alternative format. It is worthwhile giving time to this topic: marks may be lost in the examination if accounts are presented poorly.

The lesson also discusses a straightforward method of checking that all double entries have been completed satisfactorily.This checking is done by the preparation of a trial balance.

Step 1

1 Show that the balance on an account is the amount by which one side is greater than the other:

Aim: to be able to balance accounts and to recognize the significance of individual balances

Topic summary

● The balancing of accounts

● Running balance account format

● The preparation of a trial balance

Extended Syllabus references

3.1 The meaning of the term account balance 3.2 Balancing the T-type ledger account, including:

3.2.1 bringing the balance down for the start of the next accounting period 3.2.2 dealing with the nil balance

3.3 The significance of any particular account balance, eg a credit balance on a creditor account, a debit balance on an expense account

3.4 The significance of the term running balance account 3.5 The preparation of accounts in running balance form

3.7 The procedure for other end-of-period balancing, and ruling off, of accounts 11.1 The purpose of the trial balance

11.2 The preparation of a trial balance from a list of account balances

X expense account

Dr Cr

Year 3 £ Year 3 £

Entries totalling 680 Entries totalling 600

Here, there is a debit (Dr) balance of £80. The full balancing of this account at 31 March Year 3 is as follows:

X expense account

Year 3 £ Year 3 £

31 Mar Balance c/d 80

680 680

1 Apr Balance b/d 80

The balance is first carried down (c/d) and then brought down (b/d), which should always be done and not merely entered on one side.To fail to bring down the balance is to break the double-entry rule.

2 Ask the students to write out and then balance the following creditor account:

K Jacques

Year 5 £ Year 5 £

7 May Returns outwards 50 3 May Purchases 620

28 May Bank 570 21 May Purchases 415

3 Explain a ‘nil’ balance:

F Wiles

Year 6 £ Year 6 £

4 July Sales 370 12 July Returns inwards 40

29 July Bank 330

370 370

Or a variation on the nil balance:

T Stone

Year 6 £ Year 6 £

9 Aug 470 26 Aug Bank 470

Point out that no totals are required in this instance; just two lines under the figures.

4 Hand out copies of, or show on the overhead projector, exercises T/4.1 and T/4.2 in the Appendix (page 206). Ask the students to work through them.

Balancing accounts: the trial balance

Entries 680 Entries 600

Step 2

1 Emphasize that, so far, the format used for the accounts has been two-sided, ie:

Balances are calculated at the end of a fixed period – usually monthly for debtors and creditors; annually in some other cases; and so on.This layout does not reveal the balance easily or quickly. However, the running-balance format, which is a three-column layout, shows the balance after each transaction is entered. It is used by banks in the (monthly) statements they issue to customers.

2 An example of an account in running-balance format is included in the Appendix (see T/4.3, page 207). Point out that this example is not a specimen of the statements issued by banks. It is an example of the bank account as kept by the customer of the bank.

3 Explain the format, emphasizing that as each transaction is entered the balance on the account is brought up to date. Stress that the notation, either ‘Dr’ or ‘Cr’, must be shown beside the balance figure.

4 Ask the students to show T/4.3 as a two-sided layout, ie the format previously used in this course.Then compare running-balance format with the two-sided layout.

5 Ask the students to work through the exercise below.

Exercise Required

Using the information in T/4.2 (page 206), prepare debtor and creditor accounts in running-balance format.

Step 3

1 Work through exercise T/4.4 in the Appendix (page 207) with the students, following the instructions below.

(a) Enter the transactions in appropriate accounts.

Balancing accounts: the trial balance

Aim: to appreciate and to be able to apply the running-balance format

Left-hand side Right-hand side

debits credits

(Dr) (Cr)

Aim: to be able to prepare a trial balance

(b) Check with the class that the total of the debit entries equals the total of the credit entries.The total should be £27,220.

(c) Next ask the students to enter in pencil, in the margin, the balance on each account – either debit or credit.

(d) Now list these balances; the total of the debit balances should agree with the total of the credit balances. A trial balance has been produced.

2 Explain that the trial balance is used to check that double entry has been done correctly.

If the totals of the two sides of the trial balance are in agreement, then entries have been made accurately. It does not, however, prove that. For example, transactions could have been omitted entirely.This limitation will be considered further in Lesson 21 (see entry 11.5 in the Extended Syllabus).

3 Hand out copies of, or show on the overhead projector, exercises T/4.5 and T/4.6 in the Appendix (page 208). Ask the students to work through them.

4 Show the class the following account, which is an example of a candidate’s solution to an examination question:

F Leonard

Year 5 £ Year 5 £

10 Apr Returns outwards 30 6 Apr Purchases 418

10 Apr Returns outwards 30

In this case, a candidate has entered the transaction twice – a common mistake. One entry cancels the other for returns outwards.The examiner can only conclude that the candidate does not know how to deal with returns outwards. As a result, no marks will be given for either entry for 10 April.

Balancing accounts: the trial balance