PERIODIC WORK ON THE LEDGER
The work preliminary to summarizing the record of transactions for a
period and preparing the balance sheet and profit and loss statement
is comprised under three heads: (1) the Trial Balance, (2) Adjusting
Entries, and (3) Closing Entries. These three steps will be discussed
at this point sufficiently for practice work in closing the ledger.
Fuller treatment of the subject is reserved for later chapters, after
the nature of the transactions that may complicate the closing of the
ledger have been explained.
=The Trial Balance.=—When all transactions for the fiscal period have
been entered on the ledger, it is desirable to make sure that the
ledger is in equilibrium, i.e., to make sure that for every entry on
the debit side there is an equal credit entry, and that for every
credit entry there is an equal debit entry; in other words, that the
ledger equation explained in Chapters IX and X is maintained. This
proof of the mathematical correctness of the ledger is accomplished
by means of a device called the “Trial Balance,” which consists of a
debit and credit list of either all account totals or of all account
balances. If the total debits equal the total credits, the mathematical
equilibrium is demonstrated. A trial balance is usually set up somewhat
as follows:
TRIAL BALANCE, June 30, 19—
Dr. Cr.
Cash $ 1,000.00
Notes Receivable 1,500.00
A. B. Casey 500.00
B. C. Darby 450.00
C. D. Ebbets 200.00
D. E. Field 300.00
E. F. Gall 150.00
F. G. Hiller 350.00
Merchandise Inventory 4,000.00
Store Equipment 500.00
Depreciation Reserve Store Equipment $ 75.00
Notes Payable 1,000.00
Hill & Innes 350.00
Jones & Kanter 175.00
Lunt & Mason 200.00
Noble & Oberly 150.00
P. I. Richards, Capital 5,000.00
P. I. Richards, Personal 1,000.00
Sales 20,000.00
Purchases 12,000.00
Salaries 2,500.00
Insurance 500.00
General Expenses 2,000.00
---------- ----------
$26,950.00 $26,950.00
========== ==========
=Work Preliminary to the Trial Balance.=—Before taking a trial balance,
the accounts should be totaled on each side. These totals are shown in
small but legible pencil figures immediately beneath the last entry,
sufficient space being left for a regular entry on the line immediately
below the pencil footing. Reference to the illustration in Form 3 makes
this bookkeeping detail clear. The difference between the totals of the
account should now be shown in pencil in the explanation column on the
side of the larger amount. Taking the trial balance thus becomes merely
a transcription of pencil balances, debit or credit as the case may be,
from the list of accounts.
=Balancing an Account.=—Sometimes it is desirable, as in the Cash
account, to show on the face of the account the difference between the
total debits and credits, i.e., the balance of the account. This may be
accomplished by writing the balance on the side with the smaller total,
and by formally ruling up the account and entering in ink the totals on
both sides, which totals, of course, are now equal. It should be noted
that the total rules in the money columns are drawn on the same line
on both sides of the account, thus leaving several blank lines on the
debit side. This is done so that the entries in the new section of the
account will start on the same line for both debits and credits. On the
next line below the double ruling, the balance item is brought down
to its proper side. The account is now said to have been closed as to
all items above the rulings and shows its open balance in the one item
beneath the rulings. The method of balancing and ruling accounts is
illustrated in the Cash account shown in Form 3.
It is important to bear in mind that the closing balance of the account
is on the side showing the smaller _pencil_ total, whereas the opening
balance which appears beneath the ruling is on the opposite side. The
only purpose of the entry on the smaller side is to force an equality
of the two sides, thus formally closing all entries to that point
and showing the “balance” as a single item in the new portion of the
account.
It should be noticed that this “balance” entry does not disturb the
equilibrium of the books, because it is entered on both the debit and
credit sides of the same account.
=Use of Red Ink.=—The total and closing rulings and the balancing
entry are sometimes made in red ink, but black ink is preferable. The
use of red ink is usually reserved for recording subtraction items in
the same column with those from which the subtraction is to be made.
Where red ink is so used, the total of the “red” is subtracted from the
total of the “black” amounts and the net result is shown in the total
of the column. When there are only a few “red” items, this method of
recording obviates the use of a separate column for them. Such red ink
entries are not found in the standard ledger, being confined to special
ledgers and columnar statements of various kinds.
[Illustration: Form 3. Account Balanced and Ruled]
=Rulings.=—The single lines above the totals, indicating the addition,
extend only through the money columns and are on the same line on both
debit and credit sides. The closing rulings beneath the footings are
double and extend through the date columns, the money columns, and the
posting reference columns. The diagonal line on the debit side from the
total line to the date column for the last entry is for the purpose of
filling all blank lines, and preventing any further entries on them
after the account is formally closed, as such entries would have the
effect of falsifying the totals shown. Thus the diagonal line which may
be on either debit or credit side serves as a safeguard against fraud.
Diagonal rulings, however, are not used so extensively as formerly.
=Transferring.=—When for any reason it is desirable to transfer an
account from one page to another, the transfer is made by means of an
entry similar to the “balance” entry shown in the Cash account above.
Instead of the word “Balance,” the word “Transfer” or “Forward” is
used, and in the column between the explanation and money columns
is entered the number of the page to which the transfer is made. On
that page the account name appears, and the first entry is the amount
transferred from the old account, with a page reference to the old
account in the reference column. In making the transfer it is customary
to close the portion of the account on the old page in the manner
explained above, and to transfer only the balance.
Sometimes an entry may be made in an account in error and for this
or some other reason may need to be transferred. Assuming, for the
purpose of illustration, that such an entry is a credit, its amount
is first written as a subtraction item on the debit side in the old
account, with proper reference to the page to which it goes. On the new
page it appears on the credit side, like the original item, and may be
considered as the contra to its transfer record in the old account. In
the new account the old page number must be entered. Great care should
be exercised in all transfer entries to show correct cross-indexing.
Sometimes it is desired to transfer not the balance but the total
debits and credits of an account. In this case the total debit amount
may be entered on the credit side of the old account and the total
credit amount on the debit side, with proper page and explanatory
references. This forces the equality of the two sides and the account
may now be totaled and ruled off. The total debit amount of the old
account is then entered on the debit side and the total credit amount
on the credit side of the new account.
A much simpler and more workable method, however, is to treat the
new account as a continuation of the old. There is then no necessity
of formally balancing the old account. The transfer is effected by
totaling both sides of the old account and indicating the new page to
which these totals are transferred, taking care to enter the totals on
the proper side of the new account, with proper references to the old
account page. This procedure is illustrated in Form 4.
=Rulings and Entries in Personal and Note Accounts.=—Some peculiarities
met with in the entries and rulings of personal and note accounts, both
receivable and payable, will be discussed here.
In John Adams’ personal account (Form 5) notice that his address is
included in the heading, that the terms of credit extended to him on
each sale are shown in the explanation space on the debit side, and
that his payments are entered on the credit side according to the date
on which they are received. If a payment appears directly opposite the
corresponding charge, with no other credits intervening, lines are
ruled underneath both the debit and the credit items to show that down
to that point the account balances. The record of dealings with each
customer should be as full as possible in order to furnish an accurate
basis for credit rating. If he is prompt in his payments, taking
advantage of the discounts offered him, the account should show this.
[Illustration: Form 4. Transfer of Account to New Page]
[Illustration: Form 5. Personal and Notes Payable Accounts]
A convenient method of showing clearly the taking of discounts, without
the need of calculating the time between dates of charge and payment,
is to enter the discount in small ink figures above the net amount
received. When two partial payments are made, as on October 1 and 15,
to settle the charge of September 20, and there are no other credits
intervening, the two credits, with the total in small figures, may be
ruled off against the single charge. At the time the trial balance
is taken—in the illustration on August 31, September 30, and October
31—the balance of the account is calculated and shown in pencil on its
proper side, debit or credit, just to the left of the reference column
on the line of the last entry on that side.
Sometimes, when payments are made out of order or on account and it
is desired to show to what particular charges they apply, an index
number or letter showing the cross-reference is used, as shown in the
Notes Payable account. As notes are issued by the business, they may be
numbered, and when it pays a particular note, the entry should show the
number of that note.
These remarks apply also to notes receivable. If full payment is
received on each note as it comes due, the entry may be made on the
same line on which the note was first recorded. This may result in the
entries to the account appearing out of chronological order, but it
assists in an easy determination of the outstanding notes. Numbering,
or preferably lettering, the entries in an account may be applied with
advantage also to the entries in personal accounts, as it aids in
locating unpaid items, especially where payments cannot be recorded in
the order in which the items to be settled have been entered.
The method of ruling and thus canceling items as explained above, is
usually limited to notes and accounts receivable and payable, that
is, to the accounts on which particular payments are received or made
and the balance of which it is desirable to ascertain at frequent
intervals. On the other hand, it is advisable that the method of
showing periodic balances, by means of small pencil figures for use in
the trial balance, be applied to all accounts.