2. Closing Balances and the and the Trial Balance

3. What’s Inside ? Learning Objectives Learning Objectives hink Corner uiz Corner Trial Balance Balancing the account Trial Balance Balancing the account

4. Learning Objectives  Close accounts at the end of a month.  Close accounts at the end of a financial year.  Prepare accounts using the running balance method.  Prepare a trial balance and state its uses and disadvantages. After reading this chapter, you will be able to:

5. No. We need to find the difference between the debit side and the credit side to see how much is left. This procedure is called closing the accounts and the difference is called the balance. There are two stages of account closing: hink Corner nswer Up to this stage, all you see from the account is a list of entries. Take the bank account as an example, after entering ten debit entries and twenty credit entries in the account, do you know how much is left in the bank? 1. Month-end closing 2. Year-end closing

6. No. We need to find the difference between the debit side and the credit side to see how much is left. This procedure is called closing the accounts and the difference is called the balance. There are two stages of account closing: hink Corner nswer Up to this stage, all you see from the account is a list of entries. Take the bank account as an example, after entering ten debit entries and twenty credit entries in the account, do you know how much is left in the bank? 1. Month-end closing 2. Year-end closing

7. Month-end closing Firms need to monitor their accounts regularly to see if there is any problem. For example, owners need to know whether they have enough cash in the bank, whether debtors are slow making payments or whether they owe creditors too much. Because of the above reasons, firms usually close the accounts at the end of each _____. After closing the accounts, the owners know the ______ of each account and they can make decisions accordingly. month balance

8. Month-end closing Take a bank account as an example. Shown below is how the account is closed at the end of a month: 20X7$ Bank Nov1Capital200,000 “ 25Cash30,000 Nov3Motor vehicles 60,000 “ 14Rent10,000 “ 22Purchases40,000 Add up the debit side and the credit side separately. Step 1 $110,000 If the total of the debit side and the total of the credit side differ, the difference is the balance of the account. Step 2 $230,000

9. Month-end closing Take a bank account as an example. Shown below is how the account is closed at the end of a month: 20X7$ Bank Nov1Capital200,000 “ 25Cash30,000 Nov3Motor vehicles 60,000 “ 14Rent10,000 “ 22Purchases40,000 $230,000 $110,000 Difference between the debit side and the credit side = $ 230,000 – $ 110,000 = $ 120,000

10. Month-end closing Take a bank account as an example. Shown below is how the account is closed at the end of a month: 20X7$ Bank Nov1Capital200,000 “ 25Cash30,000 Nov3Motor vehicles 60,000 “ 14Rent10,000 “ 22Purchases40,000 Put this balance on the side with the smaller total. This closing balance is called the balance carried down (abbreviated as balance c/d). Step 3 “ 30Balance c/d120,000 Closing balance

11. Month-end closing Take a bank account as an example. Shown below is how the account is closed at the end of a month: 20X7$ Bank Nov1Capital200,000 “ 25Cash30,000 Nov3Motor vehicles 60,000 “ 14Rent10,000 “ 22Purchases40,000 “ 30Balance c/d120,000 Enter the totals on both sides at the same level. Now the debit-side total equals the credit-side total. Step 4 230,000

12. Month-end closing Take a bank account as an example. Shown below is how the account is closed at the end of a month: The closing balance of the current month is the opening balance of the next month. This is called the balance brought down (abbreviated as balance b/d). Step 5 20X7$ Bank Nov1Capital200,000 “ 25Cash30,000 Nov3Motor vehicles 60,000 “ 14Rent10,000 “ 22Purchases40,000 “ 30Balance c/d120,000 230,000 Dec1Balance b/d120,000 Opening balance

13. Month-end closing Take a bank account as an example. Shown below is how the account is closed at the end of a month: 20X7$ Bank Nov1Capital200,000 “ 25Cash30,000 Nov3Motor vehicles 60,000 “ 14Rent10,000 “ 22Purchases40,000 “ 30Balance c/d120,000 230,000 Dec1Balance b/d120,000 The balance of $ 120,000 means that there is $ 120,000 left in the bank at the end of November. At the beginning of December, the bank account will start with $ 120,000.

14. Month-end closing From the above example, the balance c/d is on the credit side of the bank account. This means that the debit total is greater than the credit total. We call this balance a ___________. When the credit total is greater than the debit total, the balance c/d would be on the debit side. This is a ___________. $ $ debit balance $ $ credit balance

15. When the debit total is equal to the credit total, there would be no balance c/d. This is a __________. Month-end closing $ $ zero balance Debit total > Credit totalDebit balance Debit total < Credit totalCredit balance Debit total = Credit totalZero balance Note: Assets and expenses accounts usually have debit balances. Capital, liabilities and revenues accounts usually have credit balances. uiz Corner Learning Objectives

16. uiz Corner What are the balances of the following accounts? Write the balance in the appropriate column. Debit totals ($) Credit totals ($) Zero balance ($) Debit balance ($) Credit balance ($) a.Sales b.Creditor: Peter c.Van d.Bank loan e.Drawings f.Bank g.Debtor: Andrew h.Rent 0200,000 15,000 100,000 50,000 40,000 65,000 15,000 20,000 15,000 30,000 150,000 0 50,000 5,000 0 0 70,000 40,000 15,000 10,000 20,000 200,000 100,000

17. uiz Corner What are the balances of the following accounts? Write the balance in the appropriate column. Debit totals ($) Credit totals ($) Zero balance ($) Debit balance ($) Credit balance ($) a.Sales b.Creditor: Peter c.Van d.Bank loan e.Drawings f.Bank g.Debtor: Andrew h.Rent 0200,000 15,000 100,000 50,000 40,000 65,000 15,000 20,000 15,000 30,000 150,000 0 50,000 5,000 0 0 70,000 40,000 15,000 10,000 20,000 200,000 100,000

18. Year-end closing At the end of a financial year, businesses will close the accounts and prepare the ___________, including the ____________________________ and the ___________. final accounts trading and profit and loss account balance sheet Final accounts Trading and profit and loss account Trading and profit and loss account Balance sheet This allows owners to find out whether there is a profit or loss. This allows owners to know the financial situation of the business.

19. Year-end closing ______, _______ and ______ accounts will still have their balances carried forward to the next accounting year, and their balances will also appear on the ___________. _______ and _______ accounts will be closed at the year end. Balances will not be carried forward to the next accounting period. They will be transferred to the ____________________________. Assetsliabilitiescapital balance sheet Revenuesexpenses trading and profit and loss account The method of closing the accounts at the year end is the same as that for the month end, except that some accounts will be _____ at the year end and their balances will not be _____________ to the next financial year. closed carried forward

20. Year-end closing Year-end closing for revenues and expenses At the year end, the sales and purchases accounts will be closed and their balances will be transferred to the _____________, while other revenues and expenses accounts will be closed and their balances transferred to the __________________. trading account profit and loss account Example 1: JC Company’s financial year ended on 31 December 20X8. The sales account and the electricity account on that date would appear as:

21. Year-end closing 20X8$ Sales Dec1Balance b/f 150,000 Dec31Trading150,000 20X8$ Electricity Dec1Balance b/f40,000 “ 21Bank20,000 Dec31Profit and loss 60,000 60,000 You can see that the only difference between month-end closing and year-end closing is that the balances in the revenues and expenses accounts at the year end are ___ carried forward to the next period but are transferred to the ____________ or the ___________________. not trading accountprofit and loss account Learning Objectives

22. Using this kind of account, the balance is calculated after each entry. Therefore, it is called the _____________ ______. Computerised account When accounting records are kept on computers, the accounts are usually drawn up in three columns instead of in T form: one column for ___________, one for _____ ______, and the last one for the ______. debit entriescredit balance running balance Example: 20X7$ Sally Tong Sep15Bank15,000 “ 18Returns outwards5,000 Sep1Purchases 10,000 “ 7Purchases20,000 “ 25Purchases10,000 40,000 “ 30Balance c/f20,000 entries method

23. Computerised account Sally Tong 20X7 DebitCreditBalance $$$$$$ Sep1Purchases10,00010,000 Cr “ 7Purchases20,00030,000 Cr “ 15Bank15,00015,000 Cr “ 18Returns outwards5,00010,000 Cr “ 25Purchases10,00020,000 Cr The balance will be ________ using either method.the same Learning Objectives The running balance method will appear as:

24. hink Corner nswer After the year-end closing, businesses will prepare their final accounts. Should we do this immediately after closing the accounts? Or should we do something else before preparing the final accounts? We should prepare a trial balance after closing the accounts at the year end and before preparing the final accounts. A trial balance is a list of all debit balances and credit balances in the books. It is used to check the accuracy of entries in the accounts and identify errors in the books.

25. hink Corner nswer After the year-end closing, businesses will prepare their final accounts. Should we do this immediately after closing the accounts? Or should we do something else before preparing the final accounts? We should prepare a trial balance after closing the accounts at the year end and before preparing the final accounts. A trial balance is a list of all debit balances and credit balances in the books. It is used to check the accuracy of entries in the accounts and identify errors in the books.

26. Trial balance We can use a trial balance to check whether any _____ has been made in the accounts by comparing the ________________ and the _________________. Recall the accounting equation, Assets = Capital + Liabilities. We have mentioned that assets usually have ____________, while capital and liabilities usually have ____________. To have the accounting equation remain in balance, total debit balances should be ______ total credit balances. Assets = Capital + Liabilities Total debit balances = Total credit balances error total debit balancestotal credit balances debit balances credit balances equal to

27. Trial balance Example: Record the following transactions of Margaret Wong for the month of June 20X8. Balance off the accounts at the end of the month, and then extract a trial balance as at 30 June 20X8. “ 2Bought goods on credit from Nicolas Tam for $ 50,000. “ 4Bought a van by cheque for $ 60,000. “ 6Returned defective goods worth $ 1,000 to Nicolas Tam. “ 9Sold goods on credit to Benson Chow for $ 80,000. “ 11Bought another van by cheque for $ 40,000. “ 15Received a cheque from Benson Chow for $ 80,000. “ 18Paid rent of $ 20,000 in cash. “ 22Bought goods with cash for $ 40,000. “ 25Sold goods on credit to Daniel Ng for $ 60,000. “ 27Daniel returned goods totalling $ 3,000 to Margaret. “ 30Margaret took goods worth $ 1,000 as a birthday gift for her husband. Jun1Margaret Wong started business with $ 100,000 cash and $ 200,000 in the bank.

28. Trial balance Jun1Cash100,000 Jun1Capital100,000 “ 1Bank200,000 Jun1Capital200,000 20X8$ Capital 20X8$ Cash 20X8$ Bank

29. Trial balance Jun2Nicolas Tam50,000 20X8$ Purchases Jun2Purchases50,000 20X8$ Nicolas Tam

30. Trial balance Jun4Van60,000 Jun1Capital200,000 20X8$ Bank Jun4Bank60,000 20X8$ Van

31. Trial balance Jun6Returns outwards1,000 Jun2Purchases50,000 20X8$ Nicolas Tam Jun6Nicolas Tam1,000 20X8$ Returns Outwards

32. Trial balance Jun9Benson Chow80,000 20X8$ Sales Jun9Sales80,000 20X8$ Benson Chow

33. Trial balance “ 11Van40,000 Jun1Capital200,000Jun4Van60,000 20X8$ Bank “ 11Bank40,000 Jun4Bank60,000 20X8$ Van

34. Trial balance Jun1Capital200,000Jun4Van60,000 “ 11Van40,000 20X8$ Bank “ 15Benson Chow80,000 Jun15Bank80,000 Jun9Sales80,000 20X8$ Benson Chow

35. Trial balance Jun18Rent20,000 Jun1Capital100,000 20X8$ Cash Jun18Cash20,000 20X8$ Rent

36. Trial balance “ 22Purchases40,000 Jun1Capital100,000Jun18Rent20,000 20X8$ Cash “ 22Cash40,000 Jun2Nicolas Tam50,000 20X8$ Purchases

37. “ 25Daniel Ng60,000 Jun9Benson Chow80,000 20X8$ Sales Trial balance Jun25Sales60,000 20X8$ Daniel Ng

38. Trial balance Jun27Returns inwards3,000 Jun25Sales60,000 20X8$ Daniel Ng Jun27Daniel Ng3,000 20X8$ Returns Inwards

39. Trial balance Jun30Drawings1,000 “ 22Cash40,000 Jun2Nicolas Tam50,000 20X8$ Purchases Jun30Purchases1,000 20X8$ Drawings Balance off all the accounts. Step 1

40. Jun1Cash100,000 20X8$ Capital “ 1Bank200,000 “ 30Balance c/f40,000 Trial balance Jun30Balance c/f300,000 300,000 Jun1Capital100,000Jun18Rent20,000 “ 22Purchases40,000 20X8$ Cash 100,000 Credit balance: $ 300,000 Debit balance: $ 40,000

41. Trial balance “ 30Balance c/f89,000 “ 22Cash40,000 Jun2Nicolas Tam50,000Jun30Drawings1,000 20X8$ Purchases 90,000 Debit balance: $ 180,000 Debit balance: $ 89,000 “ 30Balance c/f180,000 280,000 Jun1Capital200,000Jun4Van60,000 “ 11Van40,000 20X8$ Bank “ 15Benson Chow80,000

42. Trial balance “ 30Balance c/f49,000 Jun6Returns outwards1,000Jun2Purchases50,000 20X8$ Nicolas Tam 50,000 Crebit balance: $ 49,000 Jun30Balance c/f100,000 “ 11Bank40,000 Jun4Bank60,000 20X8$ Van 100,000 Debit balance: $ 100,000

43. Jun30Balance c/f1,000 Jun6Nicolas Tam1,000 20X8$ Returns Outwards Crebit balance: $ 1,000 Jun30Balance c/f140,000 Jun9Benson Chow80,000 “ 25Daniel Ng60,000 20X8$ Sales 140,000 Crebit balance: $ 140,000 Trial balance

44. Jun9Sales80,000Jun15Bank80,000 20X8$ Benson Chow Zero balance Jun30Balance c/f20,000 Jun18Cash20,000 20X8$ Rent Debit balance: $ 20,000 Jun30Balance c/f3,000 Jun27Daniel Ng3,000 20X8$ Returns Inwards Debit balance: $3,000

45. “ 30Balance c/f57,000 Jun25Sales60,000Jun27Returns inwards3,000 20X8$ Daniel Ng 60,000 Debit balance: $ 57,000 Jun30Balance c/f1,000 Jun30Purchases1,000 20X8$ Drawings Debit balance: $1,000 Trial balance

46. Capital300,000 List all debit balances and credit balances separately. Step 2 Trial balance DrCr Margaret Wong Trial Balance as at 30 June 20X8$ Cash40,000 Bank180,000 Purchases89,000 Nicolas Tam49,000 Van100,000 Returns outwards1,000 Sales140,000 Rent20,000 Daniel Ng57,000 Returns inwards3,000 Drawings1,000

47. Find the total of debit balances and the total of credit balances and see if they are equal. Step 3 Trial balance Margaret Wong Trial Balance as at 30 June 20X8 DrCr $ Capital300,000 Cash40,000 Bank180,000 Purchases89,000 Nicolas Tam49,000 Van100,000 Returns outwards1,000 Sales140,000 Rent20,000 Daniel Ng57,000 Returns inwards3,000 Drawings1,000 490,000

48. Trial balance Uses of a trial balance: As a basis from which the final accounts are prepared. To identify error(s) in the books. To check whether the total debit balances and the total credit balances are equal. Disadvantage of a trial balance: Some errors may still exist even if the trial balance agrees. uiz Corner 1. 2. 3.

49. uiz Corner Below is a list of balances for New Way Company. What are the normal balances for the following accounts, zero balance, debit balance or credit balance? Put a ‘ ’ in the appropriate column. Then prepare a trial balance as at 31 December 20X7. Credit balance Amount ($) Zero balance Debit balance Accounts Purchases Sales Machinery Capital Salaries Drawings Bank 100,000 200,000 100,000 200,000 60,000 10,000 60,000

50. Amount ($) Zero balance Debit balance Credit balance Accounts Below is a list of balances for New Way Company. What are the normal balances for the following accounts, zero balance, debit balance or credit balance? Put a ‘ ’ in the appropriate column. Then prepare a trial balance as at 31 December 20X7. Stock Creditor: Patrick Yvonne Vanessa Debtor:Alan Grace 50,000 20,000 0 10,000 30,000 20,000 0 Frank uiz Corner

51. Purchases100,000 DrCr New Way Company Trial Balance as at 31 December 20X7$ Sales200,000 Machinery100,000 Capital200,000 Salaries60,000 Drawings10,000 Bank60,000 Stock50,000 Creditor:Patrick20,000 Vanessa10,000 Debtor:Alan30,000 Frank20,000430,000 uiz Corner

52. Below is a list of balances for New Way Company. What are the normal balances for the following accounts, zero balance, debit balance or credit balance? Put a ‘ ’ in the appropriate column. Then prepare a trial balance as at 31 December 20X7. Credit balance Amount ($) Zero balance Debit balance Accounts Purchases Sales Machinery Capital Salaries Drawings Bank 100,000 200,000 100,000 200,000 60,000 10,000 60,000

53. Amount ($) Zero balance Debit balance Credit balance Accounts Below is a list of balances for New Way Company. What are the normal balances for the following accounts, zero balance, debit balance or credit balance? Put a ‘ ’ in the appropriate column. Then prepare a trial balance as at 31 December 20X7. Stock Creditor: Patrick Yvonne Vanessa Debtor:Alan Grace 50,000 20,000 0 10,000 30,000 20,000 0 Frank uiz Corner

54. Purchases100,000 DrCr New Way Company Trial Balance as at 31 December 20X7$ Sales200,000 Machinery100,000 Capital200,000 Salaries60,000 Drawings10,000 Bank60,000 Stock50,000 Creditor:Patrick20,000 Vanessa10,000 Debtor:Alan30,000 Frank20,000430,000 uiz Corner