Unit-2 The Accounting Process
This unit discusses how various transactions are recorded in the Journal and how they will be posted into the concemed ledger accounts.
Why do you balance an account?
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- You have learnt that the 'balance' in an account signifies the net effect of all transactions related to it during a given period. It may be a debit balance or a credit balance or a nil balance depending upon whether the debit or the credit total is higher. Let us now understand the significance of a balance in respect of the various types of accounts in the ledger.
- Personal Accounts: Personal accounts are more frequently balanced as compared to any other class of accounts. Balance in a personal account indicates whether the party concerned owes to the business or the business is owing to him. When it shows a debit balance, it means that the party owes that amount to the business and he is a debtor to the business. Similarly, when it shows a credit balance, it would mean that the business owes that amount to him and he is a creditor of the business. If, however, the account shows a nil balance, it means that the account has been cleared, nothing is due to him or due from him.
- Real Accounts: Real accounts are normally balanced at the end of the accounting period primarily for the purpose of preparing the final accounts. The Cash Account, however, is balanced everyday because the actual cash is to be verified and confirmed with the closing balance shown by Cash Account. All real accounts show a debit balance as these are assets (property) accounts.
- Nominal Accounts: Nominal accounts are not to be balanced. They are simply closed by transfer to the Trading and Profit aid Loss Accounts, at the time of preparing the final accounts. However, for the purpose of understanding the procedure involved, nominal accounts have also been balanced. Even otherwise, the difference between the debit side and credit side totals have to be worked out for preparing the Trial Balance. Note that the accounts which relate to expenses or losses will show a debit balance; whereas those relating to incomes and gains will have a credit balance. This is because all expenses and losses are debited and all incomes and gains are credited.