Study tips: Ways to balance ledger accounts

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Why is it important to know how to balance a manual T account when you are unlikely to ever use one? 

As a tutor I hear this question a lot and the simple answer is, all accounts are based on the principles of manual double entry bookkeeping regardless of whether they are prepared manually using a spreadsheet or by specific accounting programs.

In this article we are going to look at how to balance accounts in four different ways to try and get to the why behind the how.  Once you understand why we balance accounts, you’ll be able to stop worrying about remembering how to do it, as you’ll have the skills to work it out.  We’re going to use a cashbook example but you’ll be able to transfer your knowledge to other ledger accounts and between manual and computerised systems.

First way – common sense

Imagine that you are a self-employed gardener and you keep a note of the money you charge customers in your diary, along with any money have paid out for business expenses.  Your entries might look like this:

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You do a calculation at the end of every month to help you keep track of where you are up to:

Firstly you add up all your ‘Ins’ which tells you your monthly sales income – in this case £165.

Then you do the same for the ‘Outs’, this October you had £109 of business expenses.

Once you take your expenses away from your income, you have £56’s worth of cash left.

However, let’s say you had £584’s worth of cash left at the end of September, so when you add on the £56 you have left at the end of this month you end up with a running total of £640.

What we have just done is balance the money that has gone in and out of the business, adjusted it to account for the opening balance and ended up with a closing balance.

Second way – manual T account

If we use the same example but present it as a traditional manual T account it looks like this:

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Everything is the same except for the layout and the only real difference in that is the balance from last month is already included.  You still need to do a calculation at the end of the month to see where you are up to but now that calculation is shown in the account in a specific way.

Here’s a step by step guide, with different figures for illustration purposes:

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So if we apply these steps to our T account we end up with:

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As you can see the closing balance is the same as in the common sense way.  In fact it is all the same as the common sense way, we just started with the opening balance, accounted for both the increases and decreases to the account and ended up with a closing balance that has become the opening balance for November.

It is worth noting here that you should always balance accounts in this way, even when they only have entries on one side.  For example:

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Third way – automatic totalling

There may be occasions when you are asked to balance accounts and the totals are automatically calculated for you as you go along.  When this happens it just means you need to re-order your calculations:

If we look at the unbalanced account again, then it would look like this if the columns were being automatically totalled for you:

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You know these totals need to be the same and if we were following the steps above you would have entered £749 in both column totals.  However, this way does show that the side with the smaller value is £109 so it is easy to see that the balance to be carried down needs to be in that column.  If we simply deduct £109 from £749 then we can reasonably expect the difference of £640 to balance the account.  When you enter £640 the column total will change automatically and you’ll just need to double check that both column totals are the same and then correctly label and date the Bal c/d.

It is worth noting that bringing the balance down below the line is often not shown but it is really important to know that it will happen, as it’s the Bal b/d that will be used again.

Fourth way – account balances

That brings us to our final way to balance accounts, which is to not bother and let the computer do it for us!  The perfect solution as long as you know and understand what your accounting software is doing.  A typical accounting program would just show you the current balance of £640 with no ‘account’ as such.  That’s fine but only because you now understand that it has been calculated using the opening balance and all the increasing and decreasing account activity. If you want to see the transactions you’ll need to look at the details of the account or run a report, either of which might look like this:

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This is completely different in its presentation and layout to either your T account or diary entries but still contains the same information and uses the same basic calculations to arrive at the closing balance of £640.

As you now know how to balance an account manually and understand the links between opening and closing balances as well as increasing and decreasing account activity, the presentation of an account will no longer be a barrier to balancing it.

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Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.

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