Balancing of Ledger Accounts

Balancing of Ledger Accounts

In this article we would explain the process of balancing the ledger accounts. This process has been explained with a sample example.

The recording, classification and balancing of ledger accounts have been explained with two simple journal entries. Purchase of PKR 10,000 and 20,000 from Mr. Ali at different dates have been explained below;

1.   Recording Journal Entries

   Purchases debited being in increase in expense  , while Ali account is credited being increase in liability.

No	Date	Particular	Folio	Dr.	Cr.
1	21.08.2016	Purchases		10,000
	21.08.2016	Ali			10,000
2	21.08.2016	Purchases		20,000
	21.08.2016	Ali			20,000

    2.   Ledger Accounts

Above journal entries have been classified into two accounts i.e. Purchase a/c and Ali a/c. The purchases account is debited, while Ali account is credited.

                                                   Purchase A/c

No	Particulars	Dr.	No	Particulars	Cr
1	Ali	10,000
2	Ali	20,000

                                                     Ali A/c

No	Particulars	Dr	No	Particulars	Cr
			1	Purchases	10,000
			2	Purchases	20,000

At the end of each period, the ledger accounts are balanced to calculate the closing         balance of each account. The process of balancing have been explained below

a)   Total Both Sides

Total of both sides  of an account is calculated and total of greater side would be written at the bottom of both sides ledger account or T account. Accountant can easily work out the closing balance with the help of this total.

b)   Difference is Closing Balance

Difference between the debit and credit side is calculated and such difference is known as balance or closing balance of the account. 

This process is quite straightforward, when all transactions are appearing on one side of the account. The balance may be calculated by simply adding all transaction appearing on one side. 

The process is a bit complicated, when the transactions are appearing on both sides of the account. In this case you need to perform simple mathematics of subtraction i.e. subtracting the greater side total from the smaller side total.

c)   Debit or Credit Balance.

If the debit side is greater than credit side, then balance would be debit balance, otherwise it would be credit balance.

In below example, the purchases account has debit balance, because purchases debit side is greater, while Ali’s account has credit balance, because Ali’s a/c credit side is greater.

                                                     Purchase A/c

No	Particulars	Dr	No	Particulars	Cr
1	Ali	10,000
2	Ali	20,000	Balance		30,000
Total		30,000	Total		30,000

                                                       Ali A/c

No	Particulars	Dr	No	Particulars	Cr
			1	Purchases	10,000
	Balance	30,000	2	Purchases	20,000
		30,000			30,000

d)  Transfer of Balance

Debit balance transfer to debit side of trial balance, while credit balance transfer on credit side. The following trial balance explains the balance transfer process

Head of Accounts	Debit	Credit
Purchases	30,000
Ali		30,000
Total	30,000	30,000

In this article we have briefly explained the balancing process of ledger accounts. Examples of balancing the ledger account are available in the example section of this blog.

Characteristics of Assets

Characteristics of Assets

In this article we would explain the characteristics of asset. These characteristics of asset are extracted from the definition of the asset.

Important Characteristics of Assets

Some important characteristics of assets include controlled resource, flow of future economic benefit, present asset, etc. These characteristics of assets have been briefly explained below

1.   Risk & Reward

An Asset is a controlled resource of organization and risks & rewards associated with that resource (asset) belongs to the company or entity.  It is important to remember that in financial accounting, control is linked with sharing of risk and rewards. Thus asset is said to be controlled by the organization, if risks and rewards of asset are shared by the entity or company.

2.   Future Economic Benefit

Second important characteristic of asset is flow of future economic benefit. Asset must have capacity to generate future economic benefit for the organization; otherwise resource cannot be treated as an asset. Thus Flow of future economic benefit is another important qualifying condition for an asset.

3.   No Future Asset

In financial accounting, there is no concept of future asset,a resource is treated as asset, when and only when, the organization exercise control over the asset as a result of past event. Thus future asset cannot be recognized in the books of account as asset and financial statement of the entity  shows only present assets.

4.   Purchase or Gifted

An asset can be created in two ways i.e. Purchase or Gift. Commercial Organizations normally acquire the asset, however, in case of nonprofit organization, many assets are gifted to Non profit organizations by the donor agencies or Government. Both types of asset (acquired or Gifted) must be reflected in book of accounts.

5.   Classification of assets

Assets can be classified by using different criteria like period, tangibility, and function. Thus asset may be classified as current & non current asset, or tangible & non tangible assets. These classification has been briefly explained below 

6.   Tangible & Non Tangible Asset

Asset can be classified on the bases of tangibility.Tangible asset can be touched like plant, machinery, while intangible assets cannot be touched like goodwill and patent rights. both tangible & intangible asset are form part of the financial statements.

7.   Current & Non Current Asset (Fixed Asset)

Assets can also be classified on the bases of period of use .Current asset are expected to generate benefit or consumed within one year, while non current asset will generate benefits for more than one year. Non current asset are also known as fixed assets. The current & non current asset concept has been explained in more details in my other article.

Another base of classification of asset is function of the asset like plant & machinery is used for manufacturing purpose, while vehicles are used for transportation.

List of important characteristics of asset

List of important characteristics of asset is as under

1.    Asset is resource controlled by entity.

2.    Entity is responsible for risk and rewards of asset.

3.    Only present asset is recognized in books of accounts.

4.    Asset may be acquire form market or as gift.