Balancing of Accounts

Balancing an account is defined as calculating the difference between the respective sides, i.e., debit and credit of an account and mentioning the balance on the side with the lesser amount. Balancing an account is essential for business—this process shows the exact position of the number of assets, liabilities and expenses made during a financial year. Balancing an account is also known as ‘trial balance’. In addition to showing the number of assets, liabilities, and expenses, it also gives the business organisation a fair view of transactions. 

Process of balancing an account

All types of transaction accounts are balanced and closed at the end of the financial year. The principal purpose behind closing a ledger account at the end of the financial year is to know the exact position of a business during a financial year or a given period. The balances of only permanent accounts are transferred to the balance sheet at the end of a financial year. Balancing an account also helps check your bank balance at the end of the financial year. Here are the steps to balance an account: 

• Step 1

The first step is to total the balances on both sides of an account, i.e., the debit and credit sides. 

• Step 2

The next step is to calculate the difference between the totalled sums on the sides of an account. 

• Step 3

If the total amount on the debit side exceeds the credit side, it is known as a ‘debit balance’. The sum is transferred to the credit side and written as ‘By balance c/d’.

• Step 4

If the balance on the credit side exceeds the debit side, it is known as a ‘credit balance’. The exceeded sum is transferred to the debit side and written as ‘To balance c/d’.

• Step 5 

The next step is to record the date on which the account is balanced. 

• Step 6 

The next step is to write both balances in the end on both sides of the account. 

• Step 7

The next step is to draw a single or double line on the balances on both sides of the account. 

Balancing of accounts helps to maintain a record of your credit and debits incurred during a financial year of a business entity and make financial plans based on it. 

Examples of balancing an account

Consider the given information:

• Purchases – Rs. 100
• Rent – Rs. 200 
• Balance in capital account – Rs. 2000
• Amount of sales – Rs. 500

A cash account is to be made. Which would look like the following: 

Cash A/c

• In this example, the figure on the debit side is more than the credit, i.e., Rs. 2,500. 
• The totalled amount (the larger amount) is written on both sides of the cash account—the debit and credit sides. 
• The next step is to calculate the difference between both sides of the account by subtracting the balances. In the above example, the difference is Rs. 2,500 – Rs. 300 = Rs. 2,200. 
• This difference is written on the credit side of the account, with ‘Balance c/f’. C/f stands for ‘carry forward’. Here, the amount of debit balance is larger, which is why this is written. The difference in both sides of this account written on the credit side will then be carried forward to the next financial year.
• In case of a larger credit balance, the difference will be written on the account’s debit side, before the total mentioned amounts, with ‘Balance c/f’. 

What is a trial balance? 

A trial balance is a list of all ledger accounts, both of capital and revenue, made during the end of the financial year for a particular business enterprise. A trial balance is a financial tool under a double-entry accounting system. There is a lot of significance of a trial balance in an accounting system. It shows the exact amount of balances all ledger accounts made for all accounting transactions that have taken place throughout the financial or accounting year. A trial balance is financially accurate when all ledger account debit and credit balances match. The main objective of preparing a trial balance is to check the arithmetical accuracy of the accounting transactions. Moreover, trial balance helps make accurate financial statements for a business. 

Conclusion

Balancing accounts is a crucial step in formulating financial statements. It is an authentication tool and gives a fair view of all accounting transactions that occurred over a financial year. This step in making the financial statements tells the exact position of a business with respect to its assets, liabilities and other expenses incurred during an accounting year. A trial balance is made to check the mathematical efficiency of all the transactions which have taken place in a financial year and the accuracy of all the ledger accounts made.