Lecture 6

Balancing accounts
and the trial
balance
Online sweepstakes
 Online sweepstakes

https://www.random-online.com/
Online sweepstakes

 The extended accounting equation

 What does debit record?

 What does credit record?

 The decrease of asset can be caused by the increase of

expenses. True or false
Lecture outline

 Balancing off T accounts

 different types of accounts will have different approaches

 Balances at end of the accounting period are

transferred to a trial balance

 This is used to prepare the financial statements as well

as to check that the accounting records are accurate
Post Transactions to T-accounts in the
General Ledger
Debit Credit

(1)
Total (2)
Debits (3)
(Increases) (4) Total
(6) Credits
(8) (Decreases)
(9)
Ending (10)
Balance Bal.

2-7
Balancing off T accounts

 After recording all the company’s transactions in the T

accounts, T accounts are balanced off.
 This means they are closed for that period and a new account is
started for the next period.
 Then, a list of balances is taken from the T accounts to
prepare the trial balance
 The trial balance is used to prepare the financial
statements
Example

1. Find the side of the account that has the bigger total

Cash
Dr. Cr.
Capital 15,000 Baking equipment 12,000
Loan 5,000
Example

2. Add up the total of all entries on the ‘big’ side and put it below
the entries
Cash
Dr. Cr.
Capital 15,000 Baking equipment 12,000
Loan 5,000

20,000
Example

3. Put the same total on the other side below all entries

Cash
Dr. Cr.
Capital 15,000 Baking equipment 12,000
Loan 5,000

20,000 20,000
Example

4. Add all amounts on the smaller side and work out the difference
between this amount and the total at the bottom
Cash
Dr. Cr.
Capital 15,000 Baking equipment 12,000
Loan 5,000
Closing Balance 8,000
20,000 20,000
Balances on T accounts
 To balance off an account, a closing entry is made.
 The type of closing entry differs with the type of T account.
 For revenue and expense accounts (accounts relating to the
statement of profit or loss):
 the T account is closed off to zero and a new account is opened
next period with no opening balance. The difference between the
debit and credit sides is posted to the SOPL account.
 For asset, liability and equity accounts (those accounts which
relate to the statement of financial position):
 the closing balance is carried forward to the next period and
becomes the opening balance in the next period.
Example – cash account
Cash – 31/12/2018
Dr. Cr.
Capital 15,000 Baking equipment 12,000
Loan 5,000
Closing Balance 8,000
20,000 20,000

Cash –31/12/ 2019

Dr. Cr.
Opening Balance 8,000
Example – revenue account
Revenue
31/12/2018
Dr. Cr.
Cookies Sales 500
SOPL account 800 Scones Sales 300
Closing Balance 0
800 800

Revenue
31/12/ 2019
Dr. Cr.
Opening Balance 0
Debit and credit balances
 When the total on the debit side of a T account is greater than
on the credit side, the account has a debit balance.
 Debit balances are usually recorded for assets (e.g. machines),
expenses (e.g. rent) and any drawings/dividends
 Where the total on the credit side is greater, this is a credit
balance and generally applies to revenues, liabilities and
capital/equity.
 Sometimes accounts which usually have a debit (credit) balance
have the opposite balance. For example, if the business has
overdrawn its cash, the balance on the cash account will be a
credit
 Learn the “normal” balances for each type of account to help
you check that your T accounts are accurate
JB Strings – recap of transactions
in January 2018
1. Jake Bigg starts a business making and selling guitars (JB Strings)
on the 1 January 2018. He uses his own £20,000 in cash to
purchase shares in the company.
2. Jake raises a bank loan for a further £50,000 on 5 January 2018.
3. Jake buys a second hand machine for cash on 8 January. This
costs £6,000. The machine is expected to last for 5 years.
4. Jake buys some wood for £2,000 payable in 1 month’s time on
10 January 2018 (from Jim).
5. On 31 January 2018, Jake sells the first guitar for £1,800 on
credit with the cash receivable in 1 months’ time. He has used
£500 of his inventory of wood to make the guitar.
Reminder of JB Strings T accounts – asset
accounts
MACHINE (NON-CURRENT ASSET)
DR CR
08-Jan Cash 6,000 These are asset
INVENTORY accounts and
DR CR should have a
10-Jan Purchases - Jim 2,000 31-Jan SOPL 500 debit balance on
them when they
RECEIVABLES (ASSET) are balanced off
DR CR
31-Jan Sales 1,800

CASH
DR CR
01-Jan Sh. Cap 20,000 08-Jan Machine 6,000
05-Jan Bk. Loan 50,000
Balancing off JB Strings T accounts
– asset accounts
MACHINE (NON-CURRENT ASSET)
DR CR The closing balances
08-Jan Cash 6,000 31-Jan Bal c/f 6,000 are transferred to
6,000 6,000
the trial balance
01-Feb Bal b/f 6,000
produced at the end
INVENTORY of January
DR CR
10-Jan Purchases - Jim 2,000 31-Jan SOPL 500
31-Jan Bal c/f 1,500
2,000 2,000
01-Feb Bal b/f 1,500
A debit balance – the
amount on the debit
RECEIVABLES (ASSET)
side is greater than on
DR CR
31-Jan Sales 1,800 31-Jan Bal c/f 1,800 the credit side
1,800 1,800
01-Feb Bal b/f 1,800
CASH
DR CR
01-Jan Sh. Cap 20,000 08-Jan Machine 6,000
05-Jan Bk. Loan 50,000 31-Jan Bal c/f 64,000
70,000 70,000
01-Feb Bal b/f 64,000
 Reminder of JB Strings T accounts
– other accounts
BANK LOAN (LIABILITY)
DR CR
05-Jan Cash 50,000
Liability
TRADE PAYABLE (LIABILITY) accounts
DR CR
10-Jan Jim - wood 2,000

SHARE CAPITAL (EQUITY)

DR CR Capital/equity
01-Jan Cash 20,000 account
PROFIT AND LOSS
DR CR
31-Jan Cost of sales/inv 500 31-Jan Credit sales 1,800

T&W use separate revenue and purchases/accounts before posting sales and COGS items to
the SOPL account. We post straight to SOPL for this small example. Either method is
acceptable but separate accounts are used for more transactions.
Balancing off/closing JB Strings T accts –
liability, equity and profit or loss
DR BANK LOAN (LIABILITY) CR
31-Jan Bal c/f 50,000 05-Jan Cash 50,000
50,000 50,000
01-Feb Bal b/f 50,000
All these
DR TRADE PAYABLE (LIABILITY) CR accounts have
31-Jan Bal c/f 2,000 10-Jan Jim - wood 2,000 credit balances
2,000 2,000 as expected for
01-Feb Bal b/f 2,000 liability and
equity accounts
DR SHARE CAPITAL (EQUITY) CR
31-Jan Bal c/f 20,000 01-Jan Cash 20,000
20,000 20,000
01-Feb Bal b/f 20,000

DR PROFIT AND LOSS CR The SOPL account is

31-Jan Cost of sales/inv 500 31-Jan Credit sales 1,800 closed and a new
31-Jan Profit for the period 1,300 account started in the
1,800 1,800 following period
The trial balance
 A trial balance is a list of the T accounts balances at the end of
an accounting period, divided between those accounts with
debit balances and those with credit balances.
 The total of the accounts in the trial balance with debit
balances should equal the total of those with credit balances.
 The trial balance is a method of internal control that provides a
check that the double entry has been correctly completed – so
it helps spot errors
 The trial balance is used in the preparation of final financial
statements.
Creating the trial balance for JB Strings at
31 January 2018
 Transfer all balances to the trial balance.
 List debit balances on the debit side of the TB and credit
balances on the credit side of the TB
 Include the profit for the year – this is a credit balance
normally, but would be a debit balance if the company made a
loss for the period
 For the TB to balance, the debits must equal the credits.
 If the TB doesn’t balance, check whether any accounts have
been omitted/miscalculated.
The trial balance for JB Strings at
31 January 2018
TRIAL BALANCE FOR JB STRINGS AT 31 JANUARY 2014
DR CR
Machine
Inventory
Trade receivables
Cash
Trade payables
Bank loan
Share capital
Profit for period
The trial balance for JB Strings at
31 January 2018

TRIAL BALANCE FOR JB STRINGS AT 31 JANUARY 2014

DR CR
Machine 6,000
Inventory 1,500
Trade receivables 1,800
Cash 64,000
Trade payables 2,000
Bank loan 50,000
Share capital 20,000
Profit for period 1,300
JB Strings
Statement of financial position at 31 January 2018
£ £
Non-current assets:
Machinery (plant) 6,000
Current assets
Inventory (wood) 1,500
Trade receivables 1,800
Cash 64,000
67,300
Current liabilities
Trade payables (2,000)
Net current assets 65,300
Long-term liabilities
Bank loan (50,000)
Net assets 21,300

Equity
Share capital 20,000
Retained profit 1,300
Total equity 21,300
 JB Strings
Statement of profit or loss for the month ended
31 January 2018
£
Revenue 1,800
Less: cost of sales 500
Profit for the period 1,300