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Previous Balance Method
Previous Balance Method
The previous balance method is a method of accounting that records accounts at their balances at the beginning of each accounting period, rather than at the end of the previous period. This method is used by businesses to ensure that accounts are accurate and up-to-date, especially when there are multiple accounts involved.
Steps to Use the Previous Balance Method:
- Record the account balances at the beginning of the current period.
- Use those balances as the beginning balances for the current period.
- Make entries for all transactions that occur in the current period.
- Calculate the account balances at the end of the current period.
- Record the account balances at the end of the current period.
Advantages:
- Accuracy: Ensures that accounts are accurate and up-to-date.
- Simplicity: Can be simpler to use than the current balance method for some businesses.
- Consistency: Provides consistent account balances throughout the accounting period.
Disadvantages:
- Additional work: Can require additional work to record account balances at the beginning of each period.
- Potential errors: Can increase the risk of errors if the balances are not recorded correctly.
- Inaccuracy: Can be inaccurate if there are changes in account balances between the beginning and end of the period.
When to Use the Previous Balance Method:
- When there are multiple accounts involved.
- When there is a risk of errors.
- When it is important to ensure that accounts are accurate and up-to-date.
Examples:
- A company has a checking account with a balance of $10,000 at the beginning of the current period. The company deposits $5,000 and withdraws $2,000 during the current period. The account balance at the end of the current period is $13,000.
- A bank has a customer account with a balance of $20,000 at the beginning of the current period. The customer deposits $10,000 and withdraws $5,000 during the current period. The account balance at the end of the current period is $25,000.
