Balancing Off Ledger Accounts Financial Accounting SS 1 First Term Lesson Notes

WEEK SIX AND SEVEN

TOPIC: Balancing Off Ledger Accounts

CONTENT

1. Balancing Ledger Accounts
2. The Divisions of the Ledger
3. Extraction of the Trial Balance

NOTES

1. Balancing Ledger Accounts

At the end of a financial period (e.g., a month, a year, or another convenient time), it is necessary to balance ledger accounts. Balancing ensures that the difference between the total debit and credit entries in each account is calculated and recorded. This balance represents the remaining amount in that account.

Steps to Balance a Ledger Account:

1. Add both sides of the ledger:
   Use a calculator to sum the debit and credit entries. Determine the difference between the totals.

   Example:

   • Debit side: ₦64,000
   • Credit side: ₦39,900
     Difference: ₦24,100
2. Record the balance carried down (c/d):
   Enter the difference on the side with the smaller total. Write “Balance c/d” (carried down) in the folio column, the date in the date column (usually the last day of the month), and the amount in the money column.
3. Total each side of the ledger:
   • Draw a single horizontal line above the total.
   • Enter the total on both sides at the same level.
   • Draw a double horizontal line below the total.
4. Carry forward the balance brought down (b/d):
   On the first day of the next period, enter the balance on the opposite side to where “Balance c/d” was recorded. Write “Balance b/d” (brought down) and update the date accordingly.

   Example Illustration (Cash Account):

   Date	Details	Folio	Dr (₦)	Cr (₦)
   2023-07-01	Capital		50,000
   2023-07-10	Sales		14,000
   2023-07-03	Purchases			8,500
   2023-07-24	K. Nasiru			9,600
   2023-07-27	Fittings			6,000
   2023-07-31	Balance c/d			39,900
   ————	————-	——-	———	———
   Totals			64,000	64,000
   2023-08-01	Balance b/d		39,900

   • Debit Balance: Total debit exceeds total credit.
   • Credit Balance: Total credit exceeds total debit.

2. The Divisions of the Ledger

As a business expands, the number of transactions increases, making it impractical to record all entries in one ledger. To maintain accuracy and convenience, the ledger is divided into sections:

1. Cash Book
   • Includes the main Cash Book and Petty Cash Book.
   • Records all cash and bank transactions.
2. Sales Ledger (Debtors Ledger):
   • Contains accounts of customers who owe the business money (debtors).
   • Example: John purchased goods worth ₦5,000 on credit.
3. Purchases Ledger (Creditors Ledger):
   • Includes accounts of suppliers to whom the business owes money (creditors).
   • Example: Goods worth ₦10,000 were bought on credit from ABC Ltd.
4. General Ledger (Nominal Ledger):
   • Records other accounts, including:
     • Assets (e.g., equipment, vehicles)
     • Liabilities (e.g., loans, rent owed)
     • Incomes (e.g., sales revenue)
     • Expenses (e.g., electricity bills)
   • Includes real accounts (assets) and nominal accounts (expenses, income, gains, and losses).

3. Extraction of the Trial Balance

The Trial Balance is a statement prepared to check the mathematical accuracy of ledger accounts. It ensures that the total debit entries equal the total credit entries, validating the double-entry bookkeeping principle.

Purpose of the Trial Balance:

1. To confirm the arithmetical accuracy of ledger accounts.
2. To detect errors in recording transactions.
3. To prepare financial statements like the Income Statement and Balance Sheet.

Format of a Trial Balance:

Note:

• Debit Balances: Assets, Expenses, Purchases, Returns Inwards.
• Credit Balances: Liabilities, Income, Capital, Sales, Returns Outwards.

EVALUATION

1. What is a ledger?
2. List and explain three classifications of the ledger.
3. Prepare a Trial Balance using the following accounts:
   • Cash ₦40,000
   • Sales ₦60,000
   • Purchases ₦30,000
   • Rent ₦10,000
   • Debtors ₦20,000
   • Creditors ₦15,000

GENERAL QUESTIONS

1. What is a Trial Balance?
2. Explain the double-entry principle.
3. Differentiate between the ledger and the journal.
4. List four features of the ledger.
5. Prepare a corrected Trial Balance if given errors in debit and credit balances.

WEEKEND ASSIGNMENT

1. The purchase of a typewriter for ₦65,000 should be debited to:
   A. Bank Account
   B. Purchases Account
   C. Cash Account
   D. Equipment Account
2. Returns inwards is also called:
   A. Carriage Inwards
   B. Carriage Outwards
   C. Purchases Returns
   D. Sales Returns
3. An account with a debit balance means:
   A. Debit entries exceed credit entries.
   B. No entries exist.
   C. It’s a real account.
   D. First entry was on the debit side.
4. Carriage inwards is incurred on goods:
   A. Displayed
   B. Sold
   C. Purchased
   D. Returned

Theory:

1. List and explain the three classifications of the ledger with examples.
2. State four differences between the ledger and the journal.