-This question was submitted by a user and answered by a volunteer of our choice.
Let me start with the term ledger balancing.
What is Ledger Balancing?
Balancing ledger accounts means totaling both the sides of the ledger account, finding the difference between the greater total & smaller total and then recording the difference on the smaller side.
If Debit side > Credit side, then we say that the ledger account has “Debit Balance”.
If Credit side > Debit side, then we say that the ledger account has “Credit Balance”.
Now, let’s move forward to discuss the question asked.
Why should a ledger be balanced?
Balancing a ledger account will help you with the following;
1. Necessary for preparation of trial balance
Trial Balance is a list of the debit and credit balances of all the ledger accounts prepared by the entity as on a specific date. Without balancing the ledger accounts, it is impossible to prepare the trial balance of an entity.
2. Necessary for the preparation of financial statements
Balancing of ledger accounts helps to prepare profit & loss account and balance sheet so as to ascertain the profit or loss and financial position of the business.
3. To determine the cash available
The amount of balance in Cash A/c gives an idea of the amount of cash available to the organization. The balance determined is compared with the actual cash available in the cash box. Discrepancies, if any are further investigated.
4. To determine the value of assets
Organizations need to know the book value of their tangible and intangible assets eg. plant & machinery, furniture, software, etc at the end of a period. So, the value of assets at a specific date can be determined only after balancing the asset ledger accounts. Assets accounts usually have a debit balance.
5. To ascertain the total expense and income
Ledger balancing of nominal accounts such as expenses eg. purchase, salary, professional fees, etc, and incomes eg. sales, interest earned, etc will indicate the number of expenses incurred and income earned during a specific period.
This will help in ascertaining the profit earned or loss incurred by the entity as the balances of nominal accounts get transferred to the statement of profit & loss. Also, the entity can make strategies to reduce the expenses if the current period expenses exceed the previous period expenses.
6. To ascertain the debt outstanding & the amount outstanding to creditors
Balancing ledger accounts pertaining to bank loans or other loans accepted will help you determine the principal amount outstanding at a given date.
Also, balancing the supplier’s accounts will help you ascertain whether the amount is payable to the supplier (credit balance) or whether you have already made advance payments but the corresponding goods or services are yet to be received (debit balance).
7. To determine the amount receivable from debtors
Balancing the debtor’s accounts will help you ascertain the amount due from your debtor (debit balance) at a particular date. In case, the debtors have already made advance payments but you haven’t rendered the corresponding goods or services, then the account will present a credit balance.
Conclusion
A ledger must be balanced because of the following reasons:
- It is necessary for preparation of trial balance.
- It is necessary for the preparation of financial statements.
- Helps to determine the cash available.
- To determine the value of assets.
- To ascertain the total expense and income.
- To ascertain the debt outstanding & the amount outstanding to creditors.
- To determine the amount receivable from debtors.