The last element of the account that we need to cover is its balance.
An account’s balance is the amount of that item at a particular point in time.
In a T-account we show the balance of the item at the start of the period (month or year) and at the end of the period.
Let’s say that for our examples regarding George's Catering, this was not the first period (year) covered. Let’s say George’s Catering had actually been operating for 3 years before this year, and that the bank account had an opening balance (the balance at the beginning of a period) of $4,300.
This would be shown as follows:
The "b/f" stands for "brought forward". Sometimes this is written as "b/d", which stands for "brought down".
At the end of the period (month or year) a brief calculation is done to work out the closing balance (the balance at the end of a period) of the account.
This is done as follows:
1. Quickly look over the account to find the side of the account that has the bigger total.
It should be fairly apparent that the debit side is the bigger side.
2. Now add up the total of all the individual entries on this side and put it as a total below all the other amounts on this side.
3. Put the same total on the other side below all the entries.
4. Add up all the individual amounts on the smaller side.
This comes to $20,700 in this example.
5. Work out the difference between this amount and the total inserted at the bottom.
$39,800 – $20,700 = $19,100
6. Put this amount in just above the total and describe it as "Balance c/f" or "Balance c/d", together with the date.
This will ensure that the smaller side also adds up to the total.
7. Take this same amount ($19,100) and insert it on the opposite side below the total, and describe this as "Balance b/f" or "Balance b/d".
The "Balance b/f" is the actual closing balance of the bank account (a debit balance). "Balance c/f" is just an entry used in calculating that the closing balance is $19,100 on the debit side. The "Balance b/f" indicates that the debit side is greater than the credit side by $19,100, and that we have $19,100 in our bank account at the end of May (the closing balance of the account).
Indeed, one could merely have taken the total of the debit side ($39,800) and subtracted the total of the credit side ($20,700) from this. We would arrive at the same answer: the bank account has a balance of $19,100 on the debit side.
However, the steps taken above represent the system that is used in accounting to work out the closing balances, and thus should be learned and practiced so that one knows what is going on with one’s accounts when one examines them.
So, we have our opening balance (debit) of $4,300 and our closing balance (debit) of $19,100. Once again, this can be determined by a quick examination of the account.
Let’s try another account – the account "loan". There were two journals involving the loan:
What would the T-account look like?
From this account we can determine that $5,000 was loaned on the 7th of April (a credit to the loan, meaning more of a liability), then $4,000 was repaid on the 13th of May (a debit, meaning less of the liability), leaving us with an outstanding balance (credit) of $1,000.
One can easily cross-reference between two accounts because of the contra account being used as the description of the transaction. In the "loan" account, "bank" is used as the description for the credit on the 7th of April. If you look in the "bank" account above, "loan" is inserted on the debit side of the T-account on the same date. We thus have an easy cross-reference.
With an account with one entry on one side, we do the following to show the closing balance:
We do not make any further entries to work out the closing balance – the $4,000 balance is self-evident from the single entry.
Remember, each account has its own code or number (called a folio number), and this would normally be inserted next to the account name. So the final prepared T-account would look like this:
"Sal-1" is the individual code for the account "salaries" and would also be referred to in the journal entries relating to salaries. "J-1" is the code for "journal page 1". The folio number or code thus helps with tracing information from the journal entry to the individual T-accounts, or from the ledger (T-accounts) back to the journal entries.
Hope you enjoyed the lesson and that balancing T-accounts is much easier now!