Closing down a ledger account
After all the transactions for an accounting period have been posted to the ledgers we will calculate the balances in each ledger account. Recording the balance in a ledger account is often referred to as “closing the account.”
The way this is done depends on whether we are calculating the ledger account balances partway through the business’ accounting year (e.g. at the end of say, the third month of the year) or at the end of the business’ accounting year.
Calculating the balances partway through the business’ accounting year
For each ledger account we calculate the difference between the debit and credit entries in the account and this is then recorded as the balance.
Calculating balances at the end of the business’ accounting year
The process is almost identical to the above, the only difference is that any balances in income or expense ledger accounts are transferred to the business’ profit and loss account and are not carried down to the start of the next period.
On this course however, we will simply deal with the first scenario; the second scenario will be dealt with in the Bookkeeping Part 3 course.
The process of closing an account
- Calculate the total of the debits and the total of the credits recorded in the ledger account since the last time the account was closed down
- Calculate the difference between the debits and credits – this is the account balance and should be recorded as follows in the ledger account
- If the total debits are greater than the total credits, the balance should be recorded on the credit side and would be described as the balance carried down (“balance c/d”) or the balance carried forward (“balance c/f”)
- If the total credits are greater than the total debits, the balance should be recorded on the debit side and would be described as the balance carried down (“balance c/d”) or the balance carried forward (“balance c/f”)
- If the total debits equals the total credits then there is no balance and we would simply move to step 5
- Add up and record the total of the debits and the total of the credits. These totals should be recorded at the same level on the page and should add up to the same total. Note that if the total debits and credits don’t add up to the same figure then an error must have been made.
- The balance carried down at the end of the period is then recorded as the balance brought down (“balance b/d”) or the balance brought forward (“balance b/f”). The balance will be positioned underneath the previous period’s totals and will be recorded on the opposite side of the ledger to where the balance carried down was recorded (i.e. if the balance c/d is on the credit side of the ledger, the balance b/d will be on the debit side)
Illustration
Step 1 is to calculate the total debits and total credits
Step 2 is to calculate the difference between the total debits and credits and record it on the smaller of the two sides (in this case the credit side). The period end date is used.
Step 3 is to calculate the totals of the debit and credit columns. The totals should be recorded at the same level on the page.
Step 4 is to bring the balance down at the start of the next period. This will be recorded on the opposite side of the ledger account to the balance carried down. The close down is now complete
Ledger accounts with a zero balance
Accountants and bookkeepers often have to deal with ledger accounts where there is no balance left on the account. Where this happens there is no need to record a £0 balance in the account. This is illustrated in the following example.
The total of the above account’s debits is £9,000 and the total of its credits is £9,000. As such, there is no balance at the end of the period. To close the account down we would simply total the columns as shown below.
