CHAPTER XIV
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.