Welcome to week 5
Week 4: Task answer
| Date/Account | Debit | Credit |
| SALES | ||
| xx.xx.xxxx | 1000 | |
| xx.xx.xxxx | 500 | |
| BANK | ||
| xx.xx.xxxx | 1000 | |
| xx.xx.xxxx | 300 | |
| xx.xx.xxxx | 60 | |
| xx.xx.xxxx | 600 | |
| DEBTORS | ||
| xx.xx.xxxx | 500 | |
| CONSULTANCY | ||
| xx.xx.xxxx | 300 | |
| FUEL | ||
| xx.xx.xxxx | 60 | |
| CREDIT CARD | ||
| xx.xx.xxxx | 600 |
The T Account
The traditional way of displaying an account is called the T account. Lets do this with the Bank account we have created so far during this course. We are also showing in this table the easiest way to balance an account. However, many bookkeeping institutions use a slightly different method for their manually written exams (shown next). The Details column is a memo showing the other side of a transaction. Typically you would also enter a reference number and any other identifying text to make it clear what this transaction was for.
| BANK ACCOUNT (using simple balancing method) | ||||||
| Date | Details | Debit (to) | Date | Details | Credit (from) | |
| xx.xx.xxxx | Sales | 1000 | xx.xx.xxxx | Fuel | 60 | |
| xx.xx.xxxx | Consultancy | 300 | xx.xx.xxxx | Credit Card | 600 | |
| Column Totals | 1300 | 660 | ||||
| xx.xx.xxxx | Balance B/D | 640 | ||||
You can see where the name T account comes from. It is the shape. Debits on the left of the centre of the ‘T’, credits on the right.
Simple Way To Balance An Account
- Add up the two columns and enter the totals in the next row (as shown above)
- Subtract the lower balance away from the other
- Enter the result under the column with the highest balance. In this example it is the debit column.
Note: The Balance B/D will always be positive or zero.
Traditional Way To Balance An Account For Exams
| BANK ACCOUNT (using traditional balancing method) | ||||||
| Date | Details | Debit | Date | Details | Credit | |
| xx.xx.xxxx | Sales | 1000 | xx.xx.xxxx | Fuel | 60 | |
| xx.xx.xxxx | Consultancy | 300 | xx.xx.xxxx | Credit Card | 600 | |
| Balance C/D | 640 | |||||
| 1300 | 1300 | |||||
| xx.xx.xxxx | Balance B/D | 640 | ||||
Key:
- Balance C/D = Balance Carried Down
- Balance B/D = Balance Brought Down
I have shown both methods for a good reason. The first is much simpler and keeps your calculations on the page (adding your debits and credits and placing the result in a new row so that you can subtract them for the result). Use this method if you want to do manual bookkeeping. It is easier to calculate and easier to audit.
Use the second method if you are taking a manual bookkeeping exam. Note that with the second method you will need a scrap of paper with you to write down the column totals and then do the subtraction before you can enter the Balance C/D total.
Note: You will see that the column totals are underlined with a single line. Traditionally this is drawn with a double underline. You must do that in exams. The medium we are showing this on does not have any method for a double underline.
What Does A Balance Mean?
Okay. We know that the bank from the previous example has a debit balance. Does that mean it is positive or negative? All we need do is apply our from/to rule. Debits = To. That means more money has gone to the bank. It’s that simple. We have a positive balance. We have money in the bank.
Let’s look at the fuel account. This time we will show the details column too (and dispense with the visual T indicator).
| FUEL | |||||
| Date | Details | Debit | Date | Details | Credit |
| xx.xx.xxxx | Bank | 60 | xx.xx.xxxx | Balance C/D | 60 |
| 60 | 60 | ||||
| xx.xx.xxxx | Balance B/D | 60 | |||
It too has a debit balance. So we have spent 60 on fuel. The fuel is in our tank right! The other side of this transaction was 60 from the bank. The bank no longer has the money. If it was the only transaction for the bank, the bank would have a credit balance (60 from). The bank would be overdrawn, but we would have fuel.
Now, lets take a look at a sales account. This is more interesting, but you should understand the concept of the flow of money more clearly after this.
| SALES | |||||
| Date | Details | Debit | Date | Details | Credit |
| xx.xx.xxxx | Bank | 1000 | |||
| xx.xx.xxxx | Bank | 500 | |||
| Balance C/D | 1500 | ||||
| 1500 | 1500 | ||||
| xx.xx.xxxx | Balance B/D | 1500 | |||
It has a credit balance! What does that mean? Are sales overdrawn because more money has come from sales? No. It is the total value of sales. It is ‘negative’ so to speak because we no longer have whatever it is we sold. Instead we have the money for it (the other side of these transactions was that money flowing to the bank as can be seen in the details column).
Go back to the fuel account and look at it again. There we have no money, but we have fuel. With sales, the stuff sold has gone, hence the credit left in its place.
Whether you choose to show accounts in a T format or just in a simple table makes no difference. Either way, you add up the columns, subtract the lesser total from the greater and place the result under the greater total.
Once we have balanced all the accounts in the system, we need a way to verify or check that they are OK. This is called the Trial Balance. Trial means test by the way. You are testing that all your credits equal your debits.
The Trial Balance
This is a list of all accounts in the system together with their balances. If the total of the debit balances exactly equal the total of the credit balances. We can say our books balance. The point of the trial balance is exactly that. To show up any obvious mistakes. What it will not do, however, is show up mispostings, wrong dates or amounts entered incorrectly on both sides of the books. Those mistakes can be found by bank, cash and credit card reconciliations, covered later.
Lets look at a trial balance for the accounts used so far.
| Account | Debit | Credit |
| Sales | 1500 | |
| Bank | 640 | |
| Debtors | 500 | |
| Consultancy | 300 | |
| Fuel | 60 | |
| Credit Card | 600 | |
| Totals | 1800 | 1800 |
You can see the debits equal the credits. This set of accounts balances. That means we can now go on to produce further accounts such as the profit and loss account. However, you should practise this a little more first, and that is the subject of the next task.
Task
Task 1
We are going to add five further transactions to our existing accounts. Your task is to enter them into the journal. Post them to the ledger. Rebalance the ledger accounts. Then create a new trial balance. Hint: this will add four new accounts to the system. Name them what you like. Make each name as meaningful as possible, however, you should be aware that the traditional name for one of the new accounts introduced in the fifth transaction is called Creditors (which means unpaid bills, or money the business owes to a supplier). Another common name for this account, especially in software, is Accounts Payable. Another name for the Debtors account is Accounts Receivable. Stick to one set or the other (ie, Debtors and Creditors or Accounts Receivable and Accounts Payable).
- A Sale for 2000 on credit (an unpaid invoice)
- A purchase of equipment for 1000 paid by credit card
- A transfer of 700 from the bank to a deposit account
- A receipt of 500 paid to the bank for an unpaid invoice you issued earlier
- You receive a bill from your stationery supplier for 200 (an unpaid bill)
Next Week
We move on to the profit and loss account exploring the magic of creating a new account based on existing ones.