# The Basic Purpose of Accounting

The basic purpose of Accounting is derivation of information.

# The target to be achieved through the accounting process - Making up the Ledger

The objective to be achieved through the whole process of accounting is to collect all the information relating to an element at a single place.

This is achieved by preparing the ledger.

Each Ledger Account provides information relating to one element. By information we mean the accounting information.

# Ledger Account - Balance, Balancing

The benefit with the ledger account is that all the accounting information relating to an element can be obtained at a single place.

Based on the information that has been posted into the ledger from the journal we can obtain the information pertaining to the date and amount of transaction and the other account affected by the transaction

Apart from these, other information, like ledger account balance, can also be derived from the ledger account.

# Ledger Account Balance

The ledger account is a collection of all the debits and credits made in relation to an account head at a single place.

The debits and credits, which are actions of opposing nature, are collected separately on either side of the account.

Ledger account balance is the net amount obtained by setting off the sum of all debits and sum of all credits against each other.

In setting off, we always assume that the greater sum is being set off from the smaller one. Thus the ledger account balance is also interpreted as

• Debit side total − Credit side total

(if debit side total is greater)

• Credit side total − Debit side total

(if Credit side total is greater)

Mathematically, ledger account balance is the absolute difference between the credit side total and the debit side total.

⇒ Ledger Account Balance

= | Debit side total − Credit side total |

# Ledger Balancing

The act of finding the balance in a ledger account is called Ledger Balancing.

# Illustration

Cash a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount
15/06/_5
19/06/_5
24/06/_5
24/06/_5
To Capital a/c
To Goods/Stock a/c
To Mr. Natekar a/c
To Commission Received a/c

2,00,000
12,000
2,000
500
17/06/_5
17/06/_5
18/06/_5
18/06/_5
21/06/_5
By Furniture a/c
By Rent Paid a/c
By Bank a/c
By Goods/Stock a/c
By Wages Paid a/c

20,000
5,000
1,50,000
10,000
5,000

Sub Total

2,14,500

Sub Total

1,90,000

The total of the debit side is 2,14,500 and that of credit side is 1,90,000.

⇒ The balance in this Ledger account is 24,500 (2,14,500 − 1,90,000).

## Sub Totals !!

Conventionally, the totals of the postings on the debit side (sum of debit side item values) or on the credit side (sum of credit side item values) are not shown in a ledger account.

To enable understanding the concept of balancing a ledger account, we have shown them and named them sub-totals.

Till you get accustomed to the concept of ledger account balancing, add up the items and show the total as sub-totals (at least with a pencil). It will help make things easier.

# Is it a Debit balance or a Credit balance?

Since the balance is obtained by setting off the sum of debit side amounts and sum of credit side amounts, we can say that what remains is related to the greater sum.

The nature of the balance is related to the greater sum.

• If the total of the debit side is greater,

the ledger account has a debit balance

• If the total of the credit side is greater

the ledger has a credit balance.

# Illustration

Cash a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount
15/06/_5
19/06/_5
24/06/_5
24/06/_5
To Capital a/c
To Goods/Stock a/c
To Mr. Natekar a/c
To Commission Received a/c

2,00,000
12,000
2,000
500
17/06/_5
17/06/_5
18/06/_5
18/06/_5
21/06/_5
By Furniture a/c
By Rent Paid a/c
By Bank a/c
By Goods/Stock a/c
By Wages Paid a/c

20,000
5,000
1,50,000
10,000
5,000

Sub Total

2,14,500

Sub Total

1,90,000

The total of the

• debit side is 2,14,500
• credit side is 1,90,000

∴ Balance in this Ledger account

= Absolute difference of totals

= | 2,14,500 − 1,90,000 |

= 24,500

Debit side total is greater than the credit side total

∴ Nature of balance is debit.

This ledger account has a debit balance of 24,500.

# When to balance? What idea does the balance give?

The ledger account is balanced periodically. In general, ledger accounts are balanced at varied time periods as daily, weekly, monthly, annually.

For what period a ledger account is to be balanced is something that is dependent on the information that we wish to derive from the account and the frequency at which we wish to derive it. There is no rule or principle to specify the period for which a particular ledger account has to be be balanced.

The period for which balancing should be done can be better understood by looking at the information that the balance itself represents.

# What idea does the ledger balance give?

Explanation for the information provided by the ledger account balance of some accounts.

## Cash a/c

Cash a/c being a real account, is debited whenever cash comes into the organisation (receipts) and is credited whenever cash goes out of the organisation (payments).

Thus, the amount of balance in Cash a/c should give an idea of the amount of cash available with the organisation.

Cash balance is an information that may be needed frequently. So, we find it a general practice that businesses assesses the amount of cash on a daily basis at the end of the day at least.

## Wages Paid a/c

Wages paid a/c is a nominal account. It is debited whenever Wages are paid.

Assuming that wages are being paid daily, if the organisation needs the information relating to the weekly expenditure on wages, it should balance the wages acount on a weekly basis.

The balance at the end of the first week indicates the first weeks expenditure. The balance at the end of the second week indicates the cumulative expenditure for the first two weeks. Deducting the balance at the end of the first week from this would give the expenditure for the second week.

## Furniture a/c

Furniture a/c being a Real account, is debited whenever Furniture comes in (bought) and is credited whenever Furniture goes out (scrapped, sold, damaged etc).

Organisations wish to know the value of their assets at least once a year, generally towards the end of the year. Thus, Furniture a/c is balanced at the end of the year.

## Mr. Ibrahim a/c

Mr. Ibrahim a/c being a personal account, is debited whenever he receives some benefit (buys goods on credit) from the organisation and is credited whenever he gives some benefit (pays money, returns goods purchased etc) to the organisation.

If the organisation needs the information relating to the balance due from Mr. Ibrahim (debtor) on a monthly basis, it should balance Mr. Ibrahim's a/c at the end of every month. The ledger balance gives the amount due and the nature of balance lets us know whether the amount is due to him or due from him.

The information may also be obtained as and when needed by balancing the account at that point when the information is needed.

# Balancing Frequency

## Frequency

• The number of occurrences within a given time period.
• oftenness

The frequency of balancing i.e. the number of times a ledger account is balanced in a time period (say a year) is dependent on the information needs of the organisation.

# Carried Forward

• Transfer from one time period to the next
• Carried Down
• Carried Over

Consider Cash a/c and assume that it is being balanced on a daily basis.

At the end of each day, the cashier would be left with a certain amount of cash. How much is what is indicated by the balance in the Cash a/c.

What would he do with that cash?. He would take it over to the next working day. This explains the use of the phrase Carried Forward or Down to represent the balance at the end of a period.

We say that the balance is carried forward (down or over) to the next day (Or) more specifically the balance is carried forward (down or over) from the end of a day to the beginning of the next day.

# Where do we show this in the Ledger Account?

• The phrase "Balance c/d" or "Balance c/f" is written immediately after the sub-total.
• It is written on the side with the lesser total.
• It is prefixed by "To" or "By" depending on which side it is being written.
Cash a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount
15/06/_5
19/06/_5
24/06/_5
24/06/_5
To Capital a/c
To Goods/Stock a/c
To Mr. Natekar a/c
To Commission Received a/c

2,00,000
12,000
2,000
500
17/06/_5
17/06/_5
18/06/_5
18/06/_5
21/06/_5
By Furniture a/c
By Rent Paid a/c
By Bank a/c
By Goods/Stock a/c
By Wages Paid a/c

20,000
5,000
1,50,000
10,000
5,000

Sub Total

2,14,500

25/06/_5
Sub Total
By Balance c/d

1,90,000
24,500
tl 2,14,500 tl 2,14,500

## Total

After writing down the balance being carried down or carried forward, if you add up the two sides starting from the sub-totals, the totals on the two sides would be the same. This is labeled as the total for each side of the ledger account.

## Steps

• Add up the amounts in the relevant columns on both sides.

Obtaining the sub-totals thereby

• Ascertain the total amount for the ledger account

= Higher of the sub-totals

Shown in the amount column as final total on both sides.

• Calculate the balance

= absolute difference between the two sub-totals.

Shown before the total, on the side having shorter total.

• Label the balance

Against the balance that is recorded,

write the phrase "Balance c/d", prefixed with

1. "By" if it falls on the credit side

(making it By Balance c/d)

2. "To" if it falls on the debit side

(making it To Balance c/d).

# Brought Forward

• Transfer from the past time period to the current
• Brought Down

Consider Cash a/c and assume that it is being balanced on a daily basis.

At the end of each day, the cashier would be left with a certain amount of cash. How much is what is indicated by the balance in the Cash a/c.

What would he do with that cash?. He would take it over to the next working day.

At the beginning of the next day, what would the cashier say?

I have brought down yesterdays cash balance. This explains the use of the phrase Brought Forward or Down to represent the balance at the beginning of a period.

We say that the balance is brought forward (down) from the previous day (Or) more specifically the balance is brought forward to the beginning of the day from the end of the previous day.

# Where do we show this in the Ledger Account?

• The phrase "Balance b/d" or "Balance b/f" is written immediately after the total.
• It is written on the side with the greater total.
• It is prefixed by "To" or "By" depending on which side it is being written.
Cash a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount
15/06/_5
19/06/_5
24/06/_5
24/06/_5
To Capital a/c
To Goods/Stock a/c
To Mr. Natekar a/c
To Commission Received a/c

2,00,000
12,000
2,000
500
17/06/_5
17/06/_5
18/06/_5
18/06/_5
21/06/_5
By Furniture a/c
By Rent Paid a/c
By Bank a/c
By Goods/Stock a/c
By Wages Paid a/c

20,000
5,000
1,50,000
10,000
5,000

Sub Total

2,14,500

25/06/_5
Sub Total
By Balance c/d

1,90,000
24,500
tl 2,14,500 tl 2,14,500
25/06/_5 To Balance b/d 24,500

# Use of Sub-Totals is optional

In practice, the total of the debit side and the credit side, which we marked as sub-totals are not shown in a ledger account.

U of sub totals helps ensure accuracy and reduce calculation errors. If you wish that the sub-totals should not appear in you final answer, use a pencil for it and erase it after you complete balancing the account.

## A balanced ledger account without the sub-totals being shown

Cash a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount
15/06/_5
19/06/_5
24/06/_5
24/06/_5
To Capital a/c
To Goods/Stock a/c
To Mr. Natekar a/c
To Commission Received

2,00,000
12,000
2,000
500
17/06/_5
17/06/_5
18/06/_5
18/06/_5
21/06/_5
25/06/_5
By Furniture a/c
By Rent Paid a/c
By Bank a/c
By Goods/Stock a/c
By Wages Paid a/c
By Balance c/d

20,000
5,000
1,50,000
10,000
5,000
24,500
tl 2,14,500 tl 2,14,500
25/06/_5 To Balance b/d 24,500

The balance in a ledger account being the difference between the two actual totals, it would be very helpful to use the sub-totals. It makes things easier for you. To stress on its optional use we have shown it in light ink.