I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART C: THE USE OF DOUBLE-ENTRY AND ACCOUNTING SYSTEMS 

 

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3

   The statement of financial position 

The balances on all remaining ledger accounts (including the profit or loss account) can be listed and 

rearranged to form the statement of financial position. 

Look back at the ledger accounts of Ron Knuckle. Now that we have dealt with those relating to income 

and expenses, which ones are left? The answer is that we still have to find out what to do with the cash, 

capital, bank loan, trade accounts payable, shop fittings, trade accounts receivable and the drawings 

accounts. 

Are these the only ledger accounts left? No: don't forget there is still the last one we opened up, called 

the profit or loss account. The balance on this account represents the profit earned by the business and, 

if you go through the arithmetic, you will find that it has a credit balance – a profit – of $2,000. (Not 

surprisingly, this is the figure that is shown in the statement of profit or loss.) 

These remaining accounts must also be balanced and ruled off, but since they represent assets and 

liabilities of the business (not income and expenses) their balances are not transferred to the P/L 

account. Instead they are carried down in the books of the business. This means that they become 

opening balances for the next accounting period and indicate the value of the assets and liabilities at the 

end of one period and the beginning of the next. 

The conventional method of ruling off a ledger account at the end of an accounting period is illustrated 

by the bank loan account in Ron Knuckle's books. 

BANK LOAN ACCOUNT 

 $ 

  $ 

 

Balance carried down (c/d) 

 

1,000 

 

Cash (D) 

 

1,000 

 

 

Balance brought down (b/d) 

 

1,000 

Ron Knuckle therefore begins the new accounting period with a credit balance of $1,000 on this 

account. A credit balance brought down denotes a liability. An asset would be represented by a debit