LESSON 3 BALANCING ACCOUNTS; THE DIVISION

Trung tâm Đào tạo E-learning Cơ hội học tập cho người LESSON 3: BALANCING ACCOUNTS; THE DIVISION OF THE LEDGER & BANK FACILITIES The objectives: After carefully studying this lesson, you should be able to: learn how to balance the accounts and identify different ways of balancing the accounts appreciate the reasons for dividing the ledger distinguish between the different types of account appreciate the main features of bank current and deposit accounts appreciate the key features of commonly used methods of paymen through a bank 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 BALANCING ACCOUNTS I.1 Method for checking the balance The procedure of balancing is as follows: Anh văn chuyên ngành I Trung tâm Đào tạo E-learning Cơ hội học tập cho người Bank Year May Capital £ Year £ 5,000 May Office furniture 350   15 Purchases 210  20 Insurance 55  23 Rendell Supplies 80  31 Balance c/d 5,000 June 4,305 5,000 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 Year £ Year £ May 23 Bank 80 May Purchases 180  24 Returns Outwards 50 Anh văn chuyên ngành I Trung tâm Đào tạo E-learning  31 Balance c/d Cơ hội học tập cho người 50 180 180 June 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 Year £ May 23 Sales 65 Year £ May 26 Returns Inwards 65 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 Debit (Dr) Date Details Credit (Cr) £ Date Details £ A balance is calculated only at the end of the relevant period (month, year, etc) Much business practice, especially with computerised records, now uses the Anh văn chuyên ngành I Trung tâm Đào tạo E-learning Cơ hội học tập cho người 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 Year May Capital £ Year £ 5,000 May Office furniture 350   15 Purchases 210  20 Insurance 55  23 Rendell Supplies 80  31 Balance c/d 4,305 5,000 June 5,000 Balance b/d 4,305 The bank account with „traditional format‟ above will now appear in „running balance‟ layout like this: Bank Date Details Debit (£) May Capital 5,000 May Office furniture Credit (£) Balance (£) Year Anh văn chuyên ngành I 5,000 Dr 350 4,650 Dr Trung tâm Đào tạo E-learning Cơ hội học tập cho người  15 Purchases 210 4,440 Dr  20 Insurance 55 4,385 Dr  23 Rendell Supplies 80 4,305 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 (d) the remaining accounts General Ledger II.2 Types of accounts (a) Personal accounts – the individual accounts of debtors and creditors Anh văn chuyên ngành I Trung tâm Đào tạo E-learning Cơ hội học tập cho người (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) Anh văn chuyên ngành I Trung tâm Đào tạo E-learning Cơ hội học tập cho người 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 Anh văn chuyên ngành I Trung tâm Đào tạo E-learning Cơ hội học tập cho người 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 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 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 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 Anh văn chuyên ngành I Trung tâm Đào tạo E-learning Cơ hội học tập cho người 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 The ledger is divided into separate ledgers, each of which records a certain type of transaction Accounts are classified to identify the nature of the entries they contain, e.g personal accounts The two main types of accounts are current accounts and deposit accounts Current accounts not normally earn interest while deposit accounts Credit transfer, standing order and direct debit are methods of making payment directly through the banking system I hope you will be successful! Anh văn chuyên ngành I Trung tâm Đào tạo E-learning Cơ hội học tập cho người GLOSSARY balance (v) (n) Cân đối Số dư cash book (n) Sổ tiền mặt credit balance (n) Dư có credit transfer (n) Ủy nhiệm chi current account (n) Tài khoản vãng lai debit balance (n) Dư nợ deposit account (n) Tài khoản tiền gửi có kỳ hạn direct debit (n) Ủy nhiệm thu fixed amount (n) Khoản tiền cố định general ledger (n) Sổ chung ledger (n) Sổ nominal account (n) Tài khoản danh nghĩa personal account (n) Tài khoản cá nhân purchases ledger (n) Sổ mua hàng real account (n) Tài khoản tài sản running balance account (n) Tài khoản cân đối số dư liên tục sales ledger (n) Sổ bán hàng standing order (n) Lệnh chi trả định kỳ transfer (v) Kết chuyển Anh văn chuyên ngành I ... 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 ,30 5 debit balance represents the reality of the. .. 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... furniture 35 0   15 Purchases 210  20 Insurance 55  23 Rendell Supplies 80  31 Balance c/d 5,000 June 4 ,30 5 5,000 Balance b/d 4 ,30 5 You first find the amount of the bigger of the two sides