Closing Balances
and the
Trial Balance
What’s Inside ?
Learning Objectives
hink Corner
Balancing the account
Trial Balance
uiz Corner
Balancing the account
Trial Balance
Learning Objectives
After reading this chapter, you will be able to:
 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.
hink Corner
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?
No. We need to find the difference
nswer 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:
1. Month-end closing
2. Year-end closing
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
month After
the accounts at the end of each _____.
balance
closing the accounts, the owners know the ______
of each account and they can make decisions
accordingly.
Month-end closing
Take a bank account as an example. Shown below
is how the account is closed at the end of a month:
Bank
20X7
Nov 1 Capital
“ 25 Cash
$
200,000
30,000
$230,000
20X7
$
Nov 3 Motor vehicles 60,000
“ 14 Rent
10,000
“ 22 Purchases
40,000
$110,000
Step 1
Add up the debit side and the credit
side separately.
Step 2
If the total of the debit side and the total
of the credit side differ, the difference is
the balance of the account.
Month-end closing
Take a bank account as an example. Shown below
is how the account is closed at the end of a month:
Bank
20X7
Nov 1 Capital
“ 25 Cash
$
200,000
30,000
$230,000
20X7
$
Nov 3 Motor vehicles 60,000
“ 14 Rent
10,000
“ 22 Purchases
40,000
$110,000
Difference between the debit side and the credit side
= $230,000 – $110,000
= $120,000
Month-end closing
Take a bank account as an example. Shown below
is how the account is closed at the end of a month:
Bank
20X7
Nov 1 Capital
“ 25 Cash
$
200,000
30,000
Closing balance
Step 3
20X7
Nov 3
“ 14
“ 22
“ 30
$
Motor vehicles 60,000
Rent
10,000
Purchases
40,000
Balance c/d
120,000
Put this balance on the side with the
smaller total. This closing balance is
called the balance carried down
(abbreviated as balance c/d).
Month-end closing
Take a bank account as an example. Shown below
is how the account is closed at the end of a month:
Bank
20X7
Nov 1 Capital
“ 25 Cash
$
200,000
30,000
230,000
Step 4
20X7
Nov 3
“ 14
“ 22
“ 30
$
Motor vehicles 60,000
Rent
10,000
Purchases
40,000
Balance c/d
120,000
230,000
Enter the totals on both sides at the
same level. Now the debit-side total
equals the credit-side total.
Month-end closing
Take a bank account as an example. Shown below
is how the account is closed at the end of a month:
Bank
20X7
Nov 1 Capital
“ 25 Cash
$
200,000
30,000
Dec 1 Balance b/d
230,000
120,000
Step 5
20X7
Nov 3
“ 14
“ 22
“ 30
$
Motor vehicles 60,000
Rent
10,000
Purchases
40,000
Balance c/d
120,000
230,000
Opening balance
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).
Month-end closing
Take a bank account as an example. Shown below
is how the account is closed at the end of a month:
Bank
20X7
Nov 1 Capital
“ 25 Cash
$
200,000
30,000
Dec 1 Balance b/d
230,000
120,000
20X7
Nov 3
“ 14
“ 22
“ 30
$
Motor vehicles 60,000
Rent
10,000
Purchases
40,000
Balance c/d
120,000
230,000
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.
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
debit balance
this balance a ___________.
$
$
When the credit total is greater than the debit
total, the balance c/d would be on the debit side.
balance
This is a credit
___________.
$
$
Month-end closing
When the debit total is equal to the credit total,
zero balance
there would be no balance c/d. This is a __________.
$
$
Debit total > Credit total
Debit balance
Debit total < Credit total
Credit balance
Debit total = Credit total
Zero balance
Note: Assets and expenses accounts usually have debit
balances. Capital, liabilities and revenues accounts
usually have credit balances.
Learning Objectives
uiz Corner
Year-end closing
At the end of a financial year, businesses will close
final accounts including
the accounts and prepare the ___________,
trading and profit and loss account and the
the ____________________________
balance
sheet
___________.
Final accounts
Trading and
profit and loss account
This allows owners to find out
whether there is a profit or loss.
Balance sheet
This allows owners to know the
financial situation of the
business.
Year-end closing
The method of closing the accounts at the year end is
the same as that for the month end, except that
closed at the year end and
some accounts will be _____
carried forward to the
their balances will not be _____________
next financial year.
______,
Assets _______
liabilities and ______
capital accounts will still
have their balances carried forward to the next
accounting year, and their balances will also appear
balance sheet
on the ___________.
Revenues and expenses
_______
_______ accounts will be closed at the
year end. Balances will not be carried forward to the
next accounting period. They will be transferred to
trading and profit and loss account
the ____________________________.
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
trading account while other revenues and expenses
_____________,
accounts will be closed and their balances transferred
profit and loss account
to the __________________.
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:
Year-end closing
Sales
20X8
Dec 31 Trading
$
150,000
20X8
Dec 1 Balance b/f
$
150,000
Electricity
20X8
Dec 1 Balance b/f
“ 21 Bank
$
40,000
20,000
60,000
20X8
Dec 31 Profit 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
not
revenues and expenses accounts at the year end are ___
carried forward to the next period but are transferred to
the ____________
trading account or the ___________________.
profit and loss account
Learning Objectives
Computerised account
When accounting records are kept on computers, the
accounts are usually drawn up in three columns instead of in
debit entries one for _____
credit
T form: one column for ___________,
______, and the last one for the ______.
entries
balance
Using this kind of account, the balance is calculated after
running balance
each entry. Therefore, it is called the _____________
method
______.
Example:
Sally Tong
20X7
$
Sep 15 Bank
15,000
“ 18 Returns outwards 5,000
“ 30 Balance c/f
20,000
40,000
20X7
Sep 1 Purchases
“
7 Purchases
“ 25 Purchases
$
10,000
20,000
10,000
40,000
Computerised account
The running balance method will appear as:
Sally Tong
20X7
Sep 1 Purchases
“
7 Purchases
“ 15 Bank
“ 18 Returns outwards
“ 25 Purchases
Debit
$
Credit
$
10,000
20,000
15,000
5,000
10,000
Balance
$
10,000
30,000
15,000
10,000
20,000
Cr
Cr
Cr
Cr
Cr
The balance will be ________
the same using either method.
Learning Objectives
hink Corner
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?
nswer
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.
Trial balance
We can use a trial balance to check whether any _____
error
has been made in the accounts by comparing the
total debit balances and the _________________.
total credit balances
________________
Recall the accounting equation, Assets = Capital +
Liabilities. We have mentioned that assets usually
debit balances while capital and liabilities
have ____________,
balances To have the accounting
usually have credit
____________.
equation remain in balance, total debit balances
to total credit balances.
should be equal
______
Assets
= Capital + Liabilities
Total debit balances = Total credit balances
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.
Jun 1 Margaret Wong started business with $100,000 cash and
$200,000 in the bank.
“ 2 Bought goods on credit from Nicolas Tam for $50,000.
“ 4 Bought a van by cheque for $60,000.
“ 6 Returned defective goods worth $1,000 to Nicolas Tam.
“ 9 Sold goods on credit to Benson Chow for $80,000.
“ 11 Bought another van by cheque for $40,000.
“ 15 Received a cheque from Benson Chow for $80,000.
“ 18 Paid rent of $20,000 in cash.
“ 22 Bought goods with cash for $40,000.
“ 25 Sold goods on credit to Daniel Ng for $60,000.
“ 27 Daniel returned goods totalling $3,000 to Margaret.
“ 30 Margaret took goods worth $1,000 as a birthday gift for her
husband.
Trial balance
Capital
20X8
$
20X8
Jun 1 Cash
“ 1 Bank
$
100,000
200,000
Cash
20X8
Jun 1 Capital
$
100,000
20X8
$
Bank
20X8
Jun 1 Capital
$
200,000
20X8
$
Trial balance
Purchases
20X8
Jun 2 Nicolas Tam
$
50,000
20X8
$
Nicolas Tam
20X8
$
20X8
Jun 2 Purchases
$
50,000
Trial balance
Bank
20X8
Jun 1 Capital
$
200,000
20X8
Jun 4 Van
$
60,000
Van
20X8
Jun 4 Bank
$
60,000
20X8
$
Trial balance
Nicolas Tam
20X8
$
Jun 6 Returns outwards 1,000
20X8
Jun 2 Purchases
$
50,000
Returns Outwards
20X8
$
20X8
Jun 6 Nicolas Tam
$
1,000
Trial balance
Sales
20X8
$
20X8
Jun 9 Benson Chow
$
80,000
Benson Chow
20X8
Jun 9 Sales
$
80,000
20X8
$
Trial balance
Bank
20X8
Jun 1 Capital
$
200,000
20X8
Jun 4 Van
“ 11 Van
$
60,000
40,000
Van
20X8
Jun 4 Bank
“ 11 Bank
$
60,000
40,000
20X8
$
Trial balance
Bank
20X8
Jun 1 Capital
“ 15 Benson Chow
$
200,000
80,000
20X8
Jun 4 Van
“ 11 Van
$
60,000
40,000
Benson Chow
20X8
Jun 9 Sales
$
80,000
20X8
Jun 15 Bank
$
80,000
Trial balance
Cash
20X8
Jun 1 Capital
$
100,000
20X8
Jun 18 Rent
$
20,000
Rent
20X8
Jun 18 Cash
$
20,000
20X8
$
Trial balance
Cash
20X8
Jun 1 Capital
$
100,000
20X8
Jun 18 Rent
“ 22 Purchases
$
20,000
40,000
Purchases
20X8
Jun 2 Nicolas Tam
“ 22 Cash
$
50,000
40,000
20X8
$
Trial balance
Sales
20X8
$
20X8
Jun 9 Benson Chow
“ 25 Daniel Ng
$
80,000
60,000
Daniel Ng
20X8
Jun 25 Sales
$
60,000
20X8
$
Trial balance
Daniel Ng
20X8
Jun 25 Sales
$
60,000
20X8
Jun 27 Returns inwards
$
3,000
Returns Inwards
20X8
Jun 27 Daniel Ng
$
3,000
20X8
$
Trial balance
Purchases
20X8
Jun 2 Nicolas Tam
“ 22 Cash
$
50,000
40,000
20X8
Jun 30 Drawings
$
1,000
Drawings
20X8
Jun 30 Purchases
Step 1
$
1,000
20X8
Balance off all the accounts.
$
Trial balance
Capital
20X8
Jun 30 Balance c/f
$
300,000
20X8
Jun 1 Cash
“ 1 Bank
300,000
$
100,000
200,000
300,000
Credit balance: $300,000
Cash
20X8
Jun 1 Capital
$
100,000
100,000
Debit balance: $40,000
20X8
Jun 18 Rent
“ 22 Purchases
“ 30 Balance c/f
$
20,000
40,000
40,000
100,000
Trial balance
Bank
20X8
Jun 1 Capital
“ 15 Benson Chow
$
200,000
80,000
20X8
Jun 4 Van
“ 11 Van
“ 30 Balance c/f
280,000
$
60,000
40,000
180,000
280,000
Debit balance: $180,000
Purchases
20X8
Jun 2 Nicolas Tam
“ 22 Cash
$
50,000
40,000
90,000
Debit balance: $89,000
20X8
Jun 30 Drawings
“ 30 Balance c/f
$
1,000
89,000
90,000
Trial balance
Nicolas Tam
20X8
$
Jun 6 Returns outwards 1,000
“ 30 Balance c/f
49,000
50,000
20X8
Jun 2 Purchases
$
50,000
50,000
Crebit balance: $49,000
Van
20X8
Jun 4 Bank
“ 11 Bank
$
60,000
40,000
100,000
Debit balance: $100,000
20X8
Jun 30 Balance c/f
$
100,000
100,000
Trial balance
Returns Outwards
20X8
Jun 30 Balance c/f
$
1,000
20X8
Jun 6 Nicolas Tam
$
1,000
Crebit balance: $1,000
Sales
20X8
Jun 30 Balance c/f
$
140,000
140,000
Crebit balance: $140,000
20X8
Jun 9 Benson Chow
“ 25 Daniel Ng
$
80,000
60,000
140,000
Trial balance
Benson Chow
20X8
Jun 9 Sales
$
80,000
20X8
Jun 15 Bank
$
80,000
Zero balance
Rent
20X8
Jun 18 Cash
$
20,000
20X8
Jun 30 Balance c/f
$
20,000
Debit balance: $20,000
Returns Inwards
20X8
Jun 27 Daniel Ng
Debit balance: $3,000
$
3,000
20X8
Jun 30 Balance c/f
$
3,000
Trial balance
Daniel Ng
20X8
Jun 25 Sales
$
60,000
60,000
20X8
$
Jun 27 Returns inwards 3,000
“ 30 Balance c/f
57,000
60,000
Debit balance: $57,000
Drawings
20X8
Jun 30 Purchases
Debit balance: $1,000
$
1,000
20X8
Jun 30 Balance c/f
$
1,000
Trial balance
Step 2
List all debit balances and credit balances
separately.
Margaret Wong
Trial Balance as at 30 June 20X8
Capital
Cash
Bank
Purchases
Nicolas Tam
Van
Returns outwards
Sales
Rent
Daniel Ng
Returns inwards
Drawings
Dr
$
40,000
180,000
89,000
100,000
20,000
57,000
3,000
1,000
Cr
$
300,000
49,000
1,000
140,000
Trial balance
Step 3
Find the total of debit balances and the total
of credit balances and see if they are equal.
Margaret Wong
Trial Balance as at 30 June 20X8
Capital
Cash
Bank
Purchases
Nicolas Tam
Van
Returns outwards
Sales
Rent
Daniel Ng
Returns inwards
Drawings
Dr
$
40,000
180,000
89,000
100,000
20,000
57,000
3,000
1,000
490,000
Cr
$
300,000
49,000
1,000
140,000
490,000
Trial balance
Uses of a trial balance:
1. As a basis from which the final accounts are
prepared.
2. To identify error(s) in the books.
3. 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