LESSON 3 BALANCING ACCOUNTS; THE DIVISION

appreciate the main features of bank current and deposit accounts 4.. The objectives: After carefully studying this lesson, you should be able to: LESSON 3: BALANCING ACCOUNTS; THE DIVIS

appreciate the key features of commonly used methods of paymen

through a bank

5

appreciate the main features of bank current and deposit accounts

4

distinguish between the different types of account

3

appreciate the reasons for dividing the ledger

2

learn how to balance the accounts and identify different ways of balancing the accounts

1

The objectives: After carefully studying this lesson, you should be able to:

LESSON 3: BALANCING ACCOUNTS; THE DIVISION

OF THE LEDGER & BANK FACILITIES

INTRODUCTION

You will learn how to close or balance accounts at the end of a period as well

as interpret balances on accounts

You will learn why is it necessary to divide the ledger, the functions of the ledger, and the different ledgers and what they record You will also learn about the different types of bank accounts and the various ways of making payments

I.1 Method for checking the balance

The procedure of balancing is as follows:

Bank

May 1 Capital 5,000 May 3 Office furniture 350

 23 Rendell Supplies 80

June 1 Balance b/d 4,305

You first find the amount of the bigger of the two sides As you become familiar with types of accounts you will soon know which side that is likely to be

The „short fall‟ amount is then entered, in this instance on the credit side The date shown is the last day of the month or period concerned „Balance c/d‟ is an abbreviation of „balance carried down‟

The „balance‟ is then placed on the left-hand side of the account – on the next available line – ready to start the next month/ period The £4,305 debit balance represents the reality of the debits exceeding the credit to that date by that amount The date shown is the first day of the new month/ period „Balance b/d‟

is an abbreviation of „balance brought down‟

In conclusion, at the end of May, bank account has debit balance of £4,305

Creditor‟s account will be balanced according to the same principles:

Rendell Supplies

 24 Returns Outwards 50

 31 Balance c/d 50

June 1 Balance b/d 50

At the end of May, this account has credit balance of £50

Another example of debtor‟s account is as follows:

N Tibbs

At the end of May, this account has „Nil‟ balance The two sides of the account are in agreement with each other You therefore total the two sides and enter a double line under each With this example, only one transaction on each side so the only requirement is to double underline the amount on both sides

You may come across the following:

c/f = carried forward

b/f = brought forward

Where balances are carried forward from one page to the next, „balance c/f‟ would appear at the bottom of one page and „balance b/f‟ at the top of the next page

I.2 Running balance accounts

The accounts we have so far had the traditional layout (T-account)

Account name

A balance is calculated only at the end of the relevant period (month, year, etc)

three-money column layout (running balance format/layout) Normally, bank uses this layout in the bank statement which bank issues to their customers The third money column states the balance resulting from the transaction recorded on the same line

Example

Bank

May 1 Capital 5,000 May 3 Office furniture 350

 23 Rendell Supplies 80

June 1 Balance b/d 4,305

The bank account with „traditional format‟ above will now appear in „running

balance‟ layout like this:

Bank

Year 3

 15 Purchases 210 4,440 Dr

With running balance accounts, it is necessary to state after each transaction

whether the balance is debit (Dr) or Credit (Cr)

Running balance presentation is based on the same „double - entry‟ (debit and credit) principles as the traditionally laid out accounts The only difference is in the format

II DIVISIONS OF THE LEDGER

II.1 Sub-divisions of the ledger

It is usual to sub-divide the ledge: each part contains a distinct type of account This has advantages of:

 Smaller units are managed more easily than one very larger

 Useful information is available easily from the specialised parts of the ledger that otherwise would be hidden

 Overall it helps in the control of the various accounts

The sub-divisions could be as follows: Named

(a) customers‟ personal accounts (debtor accounts) Sales Ledger

(b) suppliers‟ personal accounts (creditor accounts) Purchases Ledger (c) concerning with the receiving and paying money, Cash book

whether by cash, cheque or other method

II.2 Types of accounts

(a) Personal accounts – the individual accounts of debtors and creditors

(b) Impersonal accounts – the accounts of things rather than people

Impersonal accounts are sub-divided into:

* Real accounts – covering assets, e.g premises, motor vehicles, stock, cash, bank

* Nominal accounts – the various income and expense accounts, e.g sales, wages, insurance

III BANK FACILITIES

III.1 Current account

This type of account is used for regular banking and withdrawal of money The bank provided facilities for transferring money to other people, still mainly by cheque, though increasingly by other means also

It is possible for a current account to be „overdrawn‟, i.e more has been taken out of the account than has been put in Normally banks expect to be asked in advance to give their agreement to an „overdraft‟

III.2 Deposit account

With this account it is normally expected that money paid into the account will remain there for some time and that withdrawals will be infrequent Interest will

be paid by the bank on the account balance, whereas it is less likely that a current account holder will receive interest

III.3 Cheques

A cheque is a written instruction from the customer of the bank (i.e the account holder) to the bank to pay a certain amount of money

(i) to another person; or

(ii) to the account holder (eg if drawing money out of the firm‟s bank account for use as office cash)

III.4 Other payment methods

III.4.1 Credit Transfer

It is a direct means of transferring money through the bank systems, which is

initiated by the paying party It has a number of variations

 The payer gives to his or her bank a slip setting out the payment to

be made together with cash or a cheque to cover the payment The bank then transfers money to the relevant account

 The payer can fill in slips to settle many bills, covering these with a single payment (cash or cheque) for the total amount (multiple credit transfer) It is commonly used by employers for the payment of wages and salaries

 The method is much used for the paying of accounts such as for gas, electricity, or telephone services Often businesses include a bank credit slip when sending out statements of account to debtors,

to encourage payment by this method

III.4.2 Standing order

It is a direct transfer between bank accounts, involving regular payments

 of fixed amounts

 at stated dates

 to certain persons or firms

When this kind of payment happens, the payer then gives the bank written instructions to make the payments The bank will then automatically charge the payer‟s account and send a credit to the payee‟s bank Once the instruction has been given by the payer to his bank, no further action is necessary and payments would continue to be made until cancelled or amended Standing order payments can only be altered by the payer

Standing orders are much used for the payment of regular subscriptions or for the payment of hire purchase installments or insurance premiums

III.4.3 Direct debit

This method is rather like credit transfer in reverse, that is, a direct transfer initiated by the payee

First the would-be payee obtains the written agreement of the payer to the use of this method Then the payee prepares a voucher that is charged against the payer‟s bank balance and is passed through the bank clearing system

Unlike the standing order, it can be used

 for either fixed or variable amounts

and/or

 where the time intervals between payments vary

The method is open to abuse and so the bank has introduced a number of safeguards, such as restricting its use to approved organisations only The payer can withdraw the consent if dissatisfied with the working of the system

SUMMARY

1 Ledger accounts are usually balanced once a month When both sides of an account are equal, the account is cloded off by writing in the totals

2 An account has a debit balance when the opening balance is on the debit side This will occur where the total of the debit side is greater than the total of the credit side

3 An account has a credit balance when the opening balance is on the credit side This will occur where the total of the credit side is greater than the total of the debit side

4 The running balance format of account is based upon the same double entry principle as “T” accounts and shows the balance of the account after each transaction

5 The ledger is divided into separate ledgers, each of which records a certain type of transaction

6 Accounts are classified to identify the nature of the entries they contain, e.g personal accounts

7 The two main types of accounts are current accounts and deposit accounts Current accounts do not normally earn interest while deposit accounts do

8 Credit transfer, standing order and direct debit are methods of making payment directly through the banking system

I hope you will be successful!

GLOSSARY

balance (v)

(n)

Cân đối

Số dư

running balance account