What is Running balance method of maintaining ledgers and journals?

2
13072

Usually students are taught to maintain ledgers using period basis balancing or period balancing however there is another method which is more known to professional accountants to maintain certain journals and ledgers which is running balance method.

Format is a bit different from normal way of maintaining ledgers in T account format. Ledgers are maintained in similar fashion to day books where debit and credit column are kept at right and an additional column is added along debit and credit column that gives the balance of account after every transaction is entered or posted in journal or ledger respectively. The balance is represented as a debit or credit balance after each transaction is recorded. The date and description of transactions are recorded in the columns to the left. Following figure provides better understand of running balance format of ledgers.

running balance method

If it is a journal you will have a description column that describes the transaction in few words as it is the case in cash book or simply the name of the person to whom sales are made or from whom items are purchased in case of sales day book or purchase day book respectively. However, if it is a ledger then instead of description we have accounts’ title that helps us identify to which account a certain effect is made.

The advantage of maintaining books of accounts in this manner is that it allows user to have the carried down balance information on run time basis and they don’t have to wait until accounts are closed at the end of the period to know such information.

Continuing the above example as depicted in figure above if we have two additional transactions to be recorded which are as follows:

June 07, 2013 | Purchase of stock via cheque 12,000
June 08, 2013 | Bought furniture paying by cheque 30,000

On recording these two transactions the bank account will updated as follows:

running balance method 2

As you can see that two new transactions have been posted with 12,000 and 30,000 and this has led to bank balance pushed to credit zone i.e. entity must have taken overdraft from bank to pay for furniture in full.

If we would have prepared the above using the usual way that we learn in accounting classes also named as period balance or periodic closing method then it would have been presented as follows:

periodic balance method

Although every account or ledger can be maintained using this method but entities usually use a mix of periodic method and running balance method where the later approach is used to maintain such records that has high frequency of transactions. For example cash book, Sales account, Purchases account etc.

For cash and bank balances it certainly has great importance as it let you know the balance you have and the nature of balance on the fly after every transaction. It also minimize the chances of casting errors as calculation is done at each step and an calculation error can easily be spotted.

These days however, accounting software are used to maintain accounting books and users have the option to switch between different layouts i.e. periodic balancing method or running balance method.

2 COMMENTS

  1. hi.. have question.. I’m doing the running balance. however in my debit side the amount is 24000 and my balance is already in debit side then in my credit side 50000. how will I do that if I will deduct the 24000 to 50000, I will get negative, it okay. Is it the right thing to do? or I will deduct 50000-24000?

LEAVE A REPLY