At the end of an accounting period, typically at the end of a month or year, it is necessary to find the balance on each ledger account in order that a trial balance can be extracted as part of the accounting cycle. The process is referred to as ‘balancing off accounts’ or balancing the ledger.
What is a Balance?
In bookkeeping the term balance means the net difference between the debits and credits on each account. If the debits are greater than the credits the balance will be a debit balance. If the credits are greater than the debits the balance will be a credit balance.
The account balance at the start of an accounting period is referred to as the beginning balance or the opening balance. The balance at the end of an accounting period is known as the ending balance or closing balance.
Balancing off Accounts Process
At the end of the accounting period the ledger account needs to be balanced off in four stages as follows.
- Total both the debit and credit sides of the ledger account
- Calculate the balance (the difference between the total debits and total credits)
- Add a one sided entry to make the totals on both sides of the account equal. This is referred to as the balance carried down or balance c/d
- Complete the double entry with an equal and opposite entry underneath the totals. This is referred to as the balance brought down or balance b/d
Example of Balancing off Accounts
The easiest way to show the process of balancing off accounts is by looking at an example.
Suppose a business operates an accounts receivable account which as usual shows sales invoices to and cash receipts from customers. Prior to balancing off, the T account might look as follows.
To balance off the ledger account the four stage process described above can be used as follows.
Total both the debit and credit sides of the account
In the T account above the debits total is 350 (200 + 150), and the credits total is 180.
Calculate the balance
In this example the debit exceed the credits by 170 (350 – 180), so the T account has a net debit balance of 170.
Add a one sided entry to make the totals on both sides of the account equal
To make the totals on both sides equal to 350, a one sided entry of 170 is made on the credit side of the account. This entry is referred to as the balance carried down or balance c/d.
Complete the double entry with an equal and opposite entry underneath the totals
To complete the double entry posting the opposite entry of 170 is made on the debit side of the account below the totals. This entry is referred to as the balance brought down or balance b/d.
After the four stage balancing off accounts process the T account would appear as follows.
|Invoice 2||150||Balance c/d||170|
The debit balance of 170 can now be entered in the trial balance as part of the accounting cycle.
Balancing off Accounts with a Credit Balance
The process for balancing off T accounts where the total credits exceed the total debits is identical to that above except that the carried down and brought down entries would be reversed.
Suppose for example the account was a sales account recording cash and credit sales to customers. It would be normal for such an account to have a net credit balance and the balancing off accounts process would result in the following.
|Balance c/d||420||Cash sales||180|
As above, the credit balance of 420 can now be entered in the trial balance as part of the accounting cycle.
Permanent and Temporary Accounts
The result of the balancing off accounts process is that either a debit or a credit balance is brought down. The treatment of this brought down balance will differ depending on whether the account is a permanent balance sheet account such as accounts receivable or inventory, or a temporary income statement account such as sales or expenses.
The balance on a permanent account continues to the next accounting period. The next periods transactions are added to the balance brought down and at the end of the period the balancing off accounts process is repeated.
If the accounts receivable account used above is followed through to the next accounting period it would look as follows.
|Invoice 3||130||Balance c/d||225|
As the account is a permanent balance sheet account it starts with the debit balance brought down from period 1 of 170, after the current months transactions the account is again balanced off and the debit balance of 225 is brought down into period 3.
In contrast to the permanent account, the balance on a temporary account does not continue into the next accounting period. The temporary account is closed for the period by transferring the balance to the income statement.
If the sales account above is used as an example, then having balanced off the account at the end of period 1, the account is closed using closing journal entries which transfers the balance to the income statement account and eventually to retained earnings.
The account would appear as follows.
|Balance c/d||420||Cash sales||180|
|Income Statement||420||Balance b/d||420|
As the account is a temporary income statement account, after the account is balanced off, the brought down credit balance of 420 is transferred to the income statement using a closing journal. The balance on the account is now zero ready for the start of the next accounting period.
In the above examples the terms carried down and brought down were used to balance off the accounts. Alternatively the terms carried forward and brought forward could be used.
There is no hard and fast rule for when to use the different terminology. Carried down and brought down are often used when the brought down balance is directly below and on the same page as the carried down balance. On the other hand, carried forward and brought forward are often used when the brought forward balance is shown on a new page, such as when the accounts are balanced off at a year end.
The important point is to be consistent and either use down or forward but not both, and remember that whichever terminology is used, carried is always used before the totals, and brought is always used after the totals.
Use our free T Account Template to practice the process of balancing off accounts.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.