We would prefer to give you a brief description on ledger account which means collection of all kind of debits and credits that occurs within an account at a single place. Debits and credits are of opposite nature and so they need to be collected separately to distinguish and eventually presented on either side of account. Through proper statistical information, it is possible to generate actual profit of business.
When it becomes necessary to balance?
Ledger account needs to be balanced periodically. You would learn that ledger accounts should be balanced at different times and it could be done daily, weekly, monthly or annual basis. Though there is no specific rule which can speak about the right time for maintaining ledger account. The duration of ledger account balancing is not specified and it all depends on information that is obtained through account and frequency from which we wish to derive it.
If you want to know the net effect of business transaction that is recorded in ledger account, it becomes essential that accounts should be balanced properly. Balancing of Ledger account refers to balances of credit and debit side which can be equal in case these steps are followed:
- The total of each side is considered
- Difference between totals are calculated of both sides
- If debit side is found in excess to credit, then put the difference on credit side while referring is as “by balancing c/fd”
- In case total of credit side comes in excess to that of debit side, then it becomes essential to put forth the difference on debit side by mentioning it as “to balance c/fd”
- Once the difference is placed on proper side, you need to ensure that totals of both sides appear to be equal
But, before proceeding with it, the individual needs to understand about what would be in permanent accounts and temporary accounts. Permanent accounts usually consists of assets, capital and liabilities whereas, temporary accounts include expenses and revenues which are not balanced. At the end of accounting year, it becomes vital to transfer directly to trading and profit and loss account.
The closing balance of past period which is known as balance c/d can be forwarded to next accounting year as balance b/d. This would refer that the balance is carried down from previous period. The use of b/f refers to brought forward and b/o meaning brought over. In case of closing nominal accounts, they are also known as expense or revenue account, it becomes essential not to use word balance c/d and balance of these accounts will not be carried forward to next accounting year.
While balancing ledger account, it becomes absolutely necessary to record date of closing the accounts and then balancing. It is necessary to mention total amount on both sides of account which is written horizontally. The expense gets directly posted to debit side of profit and loss account. Accounts that occurs in relation to income or revenue also get closed once get transferred to profit and loss account.